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Capital and Credit Needs 
in a Changing Agriculture 



Edited by 



E. L. Baum 



Howard G. Diesslin 



Earl O. Heady 



UNIVERSITY 
OF FLORIDA 
LIBRARIES 




Digitized by the Internet Archive 
in 2013 



http://archive.org/details/capitalcreditneeOOunse 



Capital and Credit Needs 
in a Changing Agriculture 



Planning Committee 

for the Symposium 

on Capital and Credit Needs 

in a Changing Agriculture 



E. L. Baum, Chairman 

Tennessee Valley Authority 

Kenneth L. Bachman 

U.S. Department of Agriculture 

Howard G. Diesslin 

Farm Foundation 

Earl O. Heady 

Center for Agricultural and 
Economic Adjustment, 
Iowa State University 

Glenn L. Johnson 

Michigan State University, 
and Economic Consultant, 
Tennessee Valley Authority 



i/MPoSi ix-wu c>Yt 



Capital and Credit Needs 
in a Changing Agriculture 



Edited by 



E. L. BAUM 

Chief, Agricultural Economics Branch 
Tennessee Valley Authority 



HOWARD G. DIESSLIN 

Associate Managing Director, 
Farm Foundation 



EARL O. HEADY 

Professor of Economics, 
Iowa State University 
Economic Consultant, 
Tennessee Valley Authority 




Thi 



Iowa State University Press, -^rmed, Iowa, U.S.A. 



Copyright © 1961 by 

The Iowa State University Press. 

All rights reserved. 



Library of Congress Catalog Card Number: 61-11033 



Lithoprinted in the United States of America 



Foreword 



AGRICULTURE is being forced to undertake many major produc- 
tion adjustments. In order to keep up with technological de- 
velopments and cost-price relationships, farmers must increase 
capital investments in farm equipment, machinery, and buildings and 
related equipment. In addition, they must meet increased annual oper- 
ating expenses for fertilizers, new and improved seeds, insecticides, 
pesticides, and the like. Capital and credit problems have become im- 
portant limiting factors in the adjustment process. 

Because of larger farms and scale of operations, capital accumula- 
tion has been easier in some regions than in others. Adjustments in 
agriculture in the Tennessee Valley and the Southeast have been more 
difficult because farmers there lack ability to generate capital or ob- 
tain credit. The Southeast has the largest number of low -production 
and low-income farmers. Many farmers with small production units 
seek to avert risk by avoiding opportunities to obtain necessary capital 
for expanding their holdings, or for adopting improved practices neces- 
sary for more efficient operation. 

The Tennessee Valley Authority, the Farm Foundation, and the 
Center for Agricultural and Economic Adjustment at Iowa State Univer- 
sity sponsored a Symposium on "Capital and Credit Problems in a 
Changing Agriculture," with the aim of more clearly identifying these 
emerging problems and aiding in their solution. The U. S. Department 
of Agriculture actively assisted these sponsoring organizations. 

All these organizations are keenly interested in the effect of capital 
and credit problems on the future development of our nation's agricul- 
ture. TVA is vitally concerned with the comprehensive development of 
the resources in the Tennessee Valley. The Farm Foundation sponsors 
research and extension educational activities through regional agricul- 
tural research and extension work groups and committees throughout 
the United States. The Center for Agricultural and Economic Adjust- 
ment at Iowa State University is concerned with all types of problems 
related to agricultural adjustment throughout the United States. The 
U. S. Department of Agriculture is actively engaged in research on 
southern agricultural adjustment problems and related research on 
capital and credit needs. However, the conference planners recognized 
early that the best understanding of capital and credit problems for 



vi FOREWORD 

adaptation to a specific region's needs would come if the involvements 
were examined on a national basis. 

Within the framework of current and prospective economic growth 
in agriculture, the general objective of the symposium and this book is 
to examine the capital and credit structure of agriculture (1) as it has 
performed in the past, (2) as it now exists, and (3) as it might be 
changed in years ahead to encourage needed agricultural adjustments. 

It is our hope that research on and attention to these problems will 
be stimulated, not only on a state basis, but on a regional basis so that 
those who are guiding adjustments within agriculture will have the nec- 
essary information and analytical tools to guide farmers in making 
their adjustments. 



Leland G. Allbaugh, Director 
Division of Agricultural Relations 
Tennessee Valley Authority 
Knoxville, Tennessee 

Joseph Acker man, Managing Director 
Farm Foundation 
Chicago, Illinois 

Earl O. Heady, Executive Director 

Center for Agricultural and Economic Adjustment 

Iowa State University 

Ames, Iowa 



Preface 



THE 1940's and 1950's were characterized as an era of "farming 
with inflation." Farm real estate and total farm assets almost 
quadrupled in value during this 20 -year period. Capital and credit 
problems were of secondary importance as agriculture's credit base 
expanded — a result of the year-to-year increase in market value of 
farm land. Farm real estate values —stable during 1959-60 —then 
turned downward. Therefore, if agriculture is to enter an era of 
"farming without inflation," the farm economy enters this new climate 
in strong financial condition. Even so, new credit standards become 
imperative to both lenders and farm borrowers. More importantly, 
capital and credit problems quickly become primary economic prob- 
lems facing the individual farmer, farm lender, and the agricultural 
industry . 

The symposium and the contents of this book are directed toward 
agricultural workers who are conducting research and educational ac- 
tivities in the land-grant colleges, public agencies, and credit agencies. 
The ideas have been developed in five closely related subject matter 
categories: (1) capital and credit in economic growth, (2) changing 
capital structure in agriculture, (3) credit market and institutions, 

(4) values and education in relation to capital use and productivity, and 

(5) selected research for improving use and productivity of capital and 
credit. They are presented in the interest of stimulating further re- 
search and educational activities on agricultural capital and credit 
problems as they are related to agricultural development. 

It is our hope that the information and thinking presented herein 
will be useful in developing a rational approach to farm problems and 
in building a stronger agricultural industry. The problems confronting 
the farmer of the future are complicated and, in most cases, will be 
difficult to overcome. 

Part I is concerned with the nature of the growth problems in agri- 
culture, the determinants of capital formation, the basic structure of 
the capital market, indications of changes in capital productivity in dif- 
ferent agricultural regions, and trends in credit. This introductory 
section provides the background for discussions on the effects of tech- 
nology, vertical integration, and agricultural adjustments as they are 
related to capital and credit needs (Part n). 

vii 



viii PREFACE 

In Part III the authors are primarily concerned with evaluating our 
farm credit institutions and the functioning of the credit market. These 
evaluations serve as a basis for recommending improvements in the 
credit structure to meet changing needs in the different sectors of ag- 
riculture. 

Since the recommendations for improvement dwell heavily upon the 
need for greater education of both borrowers and lenders, Part IV is 
devoted to chapters dealing with values, attitudes, and investments in 
the human factor. A better understanding of these considerations 
should enable agricultural workers and credit representatives to work 
more effectively with farmers in securing a more efficient use of capi- 
tal. The goal, of course, is toward equalizing the productivity of agri- 
cultural capital with alternative uses for this capital in other sectors of 
our economy. It is hoped that the human factor as related to capital 
investments and the extension of credit will receive greater emphasis. 

Chapters dealing with selected research on capital and credit prob- 
lems are presented in Part V. It is anticipated that agricultural re- 
search workers will go much beyond the work reported here since 
there is a pressing need for such analytical research to serve as a 
basis for the development of a sound credit market designed to best 
serve a rapidly changing agriculture. 

A debt of gratitude is owed particularly to those in the sponsoring 
organizations who made possible this symposium and its reporting in 
this book, and to the Iowa State University Press, through which publi- 
cation was effected. Appreciation is extended to Mrs. Juanita W. 
Simms, Agricultural Economics Branch, Division of Agricultural Re- 
lations, TVA, for her fine cooperation in preparing the manuscript for 
publication, and to others of the secretarial staff in the branch. 

The Symposium Planning Committee received many helpful sugges- 
tions from Joseph Acker man, Farm Foundation; Leland G. Allbaugh, 
TVA; Malcolm Holliday, FHA; Ivy W. Duggan, Trust Company of Geor- 
gia; Russell C. Engberg, Farm Credit Administration; J. W. Fanning, 
University of Georgia; Carl P. Heisig, USDA; Arthur B. Mackie, TVA; 
and Norman J. Wall, USDA. 

The planning committee believes that the information presented in 
this book should contribute materially to the improvement and expan- 
sion of economic research on capital and credit problems that could aid 
in bringing about sound adjustments in agriculture. 

E. L. Baum 

Tennessee Valley Authority 

Kenneth L. Bachman 

U. S. Department of Agriculture 

Howard G. Diesslin 
Farm Foundation 

Earl O. Heady 

Iowa State University 

Glenn L. Johnson 
April, 1961 Michigan State University 






Table of Contents 



PART I: CAPITAL AND CREDIT IN ECONOMIC GROWTH 

1. The Economic Growth Problem 3 

E. L. Baum, Tennessee Valley Authority 

K. L. Bachman, U. S. Department of Agriculture 

2. Determinants of Capital Formation — Conceptual 

and Factual Considerations 19 

R. G. F. Spitze, University of Tennessee 

Discussion: 36 

C. E. Bishop, North Carolina State College 
Glenn E. Heitz, Farm Credit Administration 

3. Structure of the Capital Market and an 

Evaluation of Its Components 39 

George K. Brinegar, University of Connecticut 

Discussion: 56 

Ivy W. Duggan, Trust Company of Georgia 
Sydney D. Staniforth, University of Wisconsin 

4. Changes in Capital Productivity and 

Over -All Capital Problems 61 

Lee R. Martin, University of Arkansas 

Discussion: 79 

Sydney D. Staniforth, University of Wisconsin 

5. Trends in Credit and Capital 81 

Dale E. Hathaway, Michigan State University 

Discussion: 97 

C. E. Bishop, North Carolina State College 
Glenn E. Heitz, Farm Credit Administration 



IX 



x CONTENTS 

PART H: CHANGING CAPITAL STRUCTURE 
IN AGRICULTURE 

6. Technology and Changes in Capital Structure 103 

W. H. Scofield and Glen T. Barton, U. S. Department 
of Agriculture 

Discussion: 122 

Raymond J. Doll, Federal Reserve Bank of 
Kansas City 

7. Farm Use of Capital in Relation to Technical 

Change and Factor Price 124 

Earl O. Heady, Iowa State University 

Discussion: 145 

John Blackmore, University of Massachusetts 

8. Vertical Integration as a Source of Capital 

in Farming 147 

L. A. Jones and Ronald Mighell, U. S. Department 
of Agriculture 

Discussion: 160 

J. Warren Mather, U. S. Department of 
Agriculture 

9. Farm Family Capital Accumulation 

and Investment Processes 163 

Philip M. Raup, University of Minnesota 

10. Types of Adjustments and Capital Use in 

Agricultural Regions 177 

John C. Redman, University of Kentucky 

Discussion: 189 

John Blackmore, University of Massachusetts 
Raymond J. Doll, Federal Reserve Bank of 
Kansas City 



PART III: CREDIT MARKET AND INSTITUTIONS 

11. Farm Credit Institutions 195 

William G. Murray, Iowa State University 






CONTENTS xi 

12. Prospects for Credit Supplies Under 

Continued Economic Growth 204 

Ernest T. Baughman and John M. Wetmore, 
Federal Reserve Bank of Chicago 

13. Evaluation of the Credit Market and 

Credit Institutions 215 

Howard G. Diesslin, Farm Foundation 

14. Adequacy of Capital and Credit for Chronically 

Low -Income Farms 230 

W. E. Hendrix, U. S. Department of Agriculture 
Ben T. Lanham, Auburn University 

15. Lenders' Problems in Meeting Changing 

Credit Needs 240 

Russell C. Engberg, Farm Credit Administration 

16. Adequacy of Credit for Commercial Agriculture 

in a Growing Economy 247 

John A. Hopkin, Bank of America 

17. Adequacy of Our Agricultural Credit Structure 255 

R. B. Tootell, Farm Credit Administration 

18. Adequacy of Credit Structure as Related 

to Commercial Banks 264 

Charles N. Shepardson, Federal Reserve System 



PART IV: VALUES AND EDUCATION IN RELATION TO 
CAPITAL USE AND PRODUCTIVITY 

19. Values in the Solution of Credit Problems 271 

Glenn L. Johnson, and Lewis K. Zerby, Michigan 
State University 

20. Sociological and Social Psychological Factors 291 

Joe M. Bohlen and George M. Beal, Iowa State 
University 

21. Attitudes of Farmers Toward Credit and Capital 303 

Arthur J. Coutu and Quentin W. Lindsey, North 
Carolina State College 

Discussion: 315 

M. R. Jans sen, U. S. Department of Agriculture 
Wayne A. Corpening, Wachovia Bank and Trust 
Company 



xii CONTENTS 

22. Need for Greater Emphasis on Capital Investment 

in Human Resources 318 

Arthur B. Mackie, Tennessee Valley Authority 

Discussion: 335 

Thomas J. Whatley, University of Tennessee 

23. Relationships Between Capital and Education 337 

Roger C. Woodworth and J. W. Fanning, University 
of Georgia 

Discussion: 344 

Paul L. Holm, U. S. Department of Agriculture 
Robert A. Darr, Federal Intermediate Credit 
Bank of Columbia 



PART V: RESEARCH FOR IMPROVING USE AND 

PRODUCTIVITY OF CAPITAL AND CREDIT 

24. Decision Processes for Understanding Capital Use 

and Investment on Farms 349 

W. B. Back and Verner G. Hurt, Oklahoma State 
University 

Discussion: 361 

Edward M. Norman, First National Bank, 

Clarksville, Tennessee 

Harold G. Walkup, Tennessee Valley Authority 

25. Estimating Productivity and Financing Limits 

for Resources 363 

C. B. Baker and George D. Irwin, University of 
Illinois 

Discussion: 377 

Edward M. Norman, First National Bank, 
Clarksville, Tennessee 

26. Use of Credit for Purchases of Fertilizer 379 

J. H. Yeager, Auburn University 

Discussion: 387 

Harold G. Walkup, Tennessee Valley Authority 

27. Needed Research on Capital and Credit 389 

G. S. Tolley, North Carolina State College 

INDEX 401 



List of Tables 



Table 

Number Page 

1.1. Indices of Agricultural Inputs, 1910-58 6 

1.2. Value of Capital Per Farm, Specified Types of 
Commercial Family -Operated Farms, 1940 and 1959 .... 8 

1.3. Cash Expenditures for Specified Types of Commercial 
Family -Operated Farms, 1930-58 9 

1.4. Capital Investment on Class II Farms 12 

2.1. Total Value of Physical Farm Assets, United States, 

Census Years 1870-1950 (billions of dollars) 26 

2.2. Percentage That Various Types of Farm Capital Are of 
Total Physical Assets, by Current Prices, 1870-1950, 
United States and Selected Regions 28 

2.3. Capital, Financial, and Income Data Per Farm and 

Per Farm Worker, United States, 1958 31 

3.1. Nature of Agricultural Credit Extension by Lenders 45 

3.2. Federal Land Bank Loss Rates, 1917-1940 46 

3.3. Comparative Loss Rates of All National Banks, 
Country National Banks, and Production Credit 
Associations, 1936-1950 48 

4.1. Investments in Human Resources, by States 64 

4.2. Estimated Resource Productivity of Eleven Farmers 

in Macon County, North Carolina 73 



Xlll 



xiv LIST OF TABLES 

4.3. Estimated Resource Returns and Productivity in Selected 
Farming Areas of Iowa, Montana, and Alabama, 1950 .... 74 

4.4. Estimated Marginal Productivity of Land, Labor, and 
Capital Services in Selected Farming Areas of Iowa, 
Montana, and Alabama, 1950 77 

4.5. Estimated Average Improvement Expenditures and 
Increase in Net Income Per Farm for 7-Year 
Improvement Programs for 56 Farms 78 

5.1. Proportion of Total Farm Mortgage Loans Made or 
Recorded by Principal Lenders, United States, 1910-59. . . 84 

5.2. Farm Mortgage Debt: Percentage of Total Loans Held by 
Principal Lenders, and Total Outstanding, 

United States, 1910-1960 85 

5.3. Farm Mortgage Debt: Amount Outstanding, by Lenders, 
Selected Years, January 1, 1940-55 and 1957-59, and 
Percentage Change, 1950-59 and 1958-59, United States . . 87 

5.4. Percentage Increases in Farm Mortgage Debt, 

by Regions, 1945-59 88 

5.5. Proportion of Farm Mortgage Loans Held by 

Various Lenders, 1945, 1950, and 1958 89 

5.6. Nonreal Estate Loans to Farmers: Proportion Held by 
Principal Lending Institutions, United States, 

January 1 - Selected Years 1915-60 91 

5.7. Proportion of Nonreal Estate Loans to Farmers Held by 
Different Lending Institutions in Mid-1958 92 

6.1. Productive Assets Used in Agriculture, in Current 

Prices, United States, Specified Periods, 1940-59 105 

6.2. Productive Assets Used in Agriculture, 1947-49 Prices, 
United States, Specified Periods, 1940-59 106 

6.3. Productive Assets Per Farm in 1947-49 Prices, 

United States, Specified Periods, 1940-59 107 

6.4. Inputs Used in Agriculture, United States, 

Specified Periods, 1940-59 109 



LIST OF TABLES xv 

6.5. Average Productivity of Assets and of Inputs Used in 
Agriculture, United States, Specified Periods, 1940-59 . . . 110 

6.6. Relative Prices of Farm Labor, and Related Data, 

United States, Specified Periods, 1940-59 Ill 

6.7. Selected Measures of Capital Investments, United States, 
Appalachian Region, and Southeast, 

Specified Periods, 1940-59 113 

6.8. Appalachian Region: Productive Assets Used in 
Agriculture, in Current Prices, 

Specified Periods, 1940-59 115 

6.9. Southeast Region, Excluding Florida: Productive Assets 
Used in Agriculture in Current Prices, 

Specified Periods, 1940-59 116 

6.10. Appalachian Region: Productive Assets Used in 
Agriculture, in 1947-49 Prices, 

Specified Periods, 1940-59 117 

6.11. Southeast Region: Productive Assets Used in 
Agriculture in 1947-49 Prices, 

Specified Periods, 1940-59 118 

-6.12. Appalachian Region: Selected Measures of Capital 
Investments, in Current Prices, 
Specified Periods, 1940-59 119 

6.13. Southeast Region, Excluding Florida: Selected Measures 
of Capital Investments, Current Prices, 
Specified Periods, 1940-49 120 

7.1. Value of Farm Assets, United States 

and Per Farm Average, 1940-58 126 

7.2. Comparison of Inputs, 1937-41 and 1958, for Specified 
Types of Farms in the United States 127 

7.3. Total U. S. Agricultural Inputs and Inputs Per Farm 

for Selected Resources and Periods 129 

7.4. Changes in Asset and Debt Structure, 

U. S. Agriculture, 1940-59 133 

7.5. Farm Numbers, Income, Employment, and Indices 

of Input and Output, 1940-58 137 



xvi LIST OF TABLES 

7.6. Index of Prices Received and Prices Paid for Selected 
Inputs, 1935-59 (1935-39 = 100) 141 

7.7. Expected Effect of Changes in Price' Ratios and 

Marginal Productivities on Resource Demand 141 

9.1. Comparison of Selected Farm Production and Family 

Living Expenditures, United States and South, 1955 173 

11.1. Operating Credit to Farmers by the Major Credit 
Institutions Outstanding on January 1 in Selected Years. . . 196 

11.2. PCA Operating Loans Compared in Percentage Terms 
With Total Operating Loans of PCA's and 

Commercial Banks, January 1, 1959 197 

11.3. Estimated Percentage of Farmers Using 

PCA Credit, January 1, 1959 198 

11.4. Farm Mortgage Holdings of Major Institutions Making 
Loans to Farmers on January 1, in Selected Years 199 

12.1. Farm Debt Has Increased Relatively More Than the 
Value of Farm Physical Assets While Farm 
Income Declined 209 

13.1. Comparative Balance Sheet of Agriculture, 

January 1, 1940, and January 1, 1960 215 

13.2. Distribution of Debt Outstanding by Lenders, 

January 1, 1940, 1950, and 1960 229 

22.1. Percent of Persons Engaged in Agriculture and Wage 
and Salary Employees in Nonagricultural Establishments, 
United States and Selected Areas in the Southeast, 

1940, 1950, and 1958 321 

22.2. Distribution of Employment by Occupational Groups 
and Sex for the United States and Eleven Southeastern 
States, 1940 and 1950 323 

22.3. Years of School Completed by Farm Operators by 
Economic Class of Farms for the United States, 1950 ... . 328 

22.4. Educational Attainment by Occupational Group for Those 
Employed in the United States in 1959 329 



LIST OF TABLES xvii 

22.5. Educational Attainment of Population, Ages 25-29, 
in 1950 by Race for the United States and Selected 

Regions With Lowest Educational Attainment 333 

22.6. Expenditures for Vocational Training for the United States 
and Low-Income Southern States, Fiscal Year Ending 

June 30, 1953 334 

23.1. Education of Farm Operators in the Coastal 

Plain Area of Georgia, 1957 340 

25.1. Distribution of Cooperating Account -Keeping Farmers 
by Level of Income, East -Central (Cash -Grain Area) 

and West -Central (Livestock Area) Illinois, 1958 365 

25.2. Productivity Estimates for Selected Classes of Resources 
on Farms With Returns Less Than $5,000 to Capital and 
Management, East -Central Illinois (Grain Area), 1957 . . .365 

25.3. Productivity Estimates for Selected Classes of Resources 
on Farms With Returns Less Than $5,000 to Capital and 
Management, West-Central Illinois (Livestock Area), 

1957 366 

25.4. Actual and Optimal Use Rates for Resources, 

Cash-Grain and Livestock Farms, Illinois, 1957 367 

25.5. Financial Summaries for Farms Used To Base Loan 
Requests in Selected Farming Areas of Illinois 369 

25.6. Schedules Taken From Lenders in Two Illinois 

Farming Areas, by Type of Lender, 1959 370 

25.7. Mean Maximum Borrowing Limits, by Type of Lender 
and Proposed Use of Loan Proceeds, 

Two Areas of Illinois, 1959 372 

25.8. Mean Maximum Loan Limits, by Class of Loan, 

Two Areas of Illinois, 1959 373 

25.9. Comparison of Optimal Resource Quantities and 
Quantities Owned and Capable of Being Financed, 
Livestock Area, 1959 375 

25.10. Comparison of Optimal Resource Quantities and 
Quantities Owned and Capable of Being Financed, 
Cash-Grain Area, 1959 375 



xviii LIST OF TABLES 

25.11. Comparison of Structural Features of the Farms 
Used in Productivity Estimates and in the 
Lending Situation 376 

26.1. Sources of Credit Used for Fertilizer Purchases, 

268 Farmers, Alabama, 1957 380 

26.2. Range and Average Annual Rate of Interest Paid on 
Fertilizer Loans According to Source of Credit, 

206 Farms, Alabama, 1957 381 

26.3. Selected Characteristics of Farmers Who Used Credit 
and Those Who Did Not Use Credit for 

Fertilizer Purchases, Alabama, 1957 383 

26.4. Relative Importance of Factors Considered by 
Fertilizer Dealers and Commercial Banks in 
Extending Credit to Farmers With a Good 
Credit Rating and to Those With a Poor 

Credit Rating, Alabama, 1958 386 

27.1. Classification of Studies in Agricultural Finance 390 



List of Figures 



Figure 

Number Page 

1.1.-- Agricultural inputs per unit of farm operator and family 

labor, 1910-58. (1947-49 = 100) 7 

2.1.-- General summary of capital formation process in 

agriculture (estimated from data in previous discussion). . 35 

8.1.-- Expected mortality of broilers 152 

8. 2. --Expected broiler prices 153 

10.1.-- Changes in rate of return on market value of capital used 

in farm production, U. S 188 

12.1.-- Agricultural loans outstanding, bank deposits, and bank 

loan ratios 31 agricultural states 212 

22.1.-- U. S. labor force becoming more skilled 322 

22.2.-- Farm employment declines in Southeast 324 

22.3.-- Education is one of the factors affecting income 331 

24.1.-- Hypothesized relation of dimensions of value -space 

and utility 252 

24. 2. --Effect of levels of knowledge upon discounts for time. . . .253 

24.3.-- Illustration of value-space for two dimensions 255 

24.4.-- Possible combinations of effort, time, knowledge, 

and capital for a value -space 256 

25.1.-- Location of lending institutions (Illinois) 364 

xix 



PART I 

Capital and Credit 
in Economic Growth 

► Agricultural Growth Problems 

► Capital Formation 

► Capital Market Structure 

► Capital Productivity 

► Capital and Credit Trends 



Chapter 1 

E. L. BAUM 
Tennessee Valley Authority 

K. L. BACHMAN 

Agricultural Research 
Service, USDA 



The Economic Growth. 
Problem 



AGRICULTURE HAS EXPERIENCED unprecedented changes in 
the technology and economics of production and marketing since 
1940. This general trend is expected to continue at a rapid pace. 
Capital and credit in agriculture represent an important and somewhat 
neglected aspect of the substantial adjustment and economic growth 
problems facing American agriculture. These problems are important 
nationally, and they have some especially important implications for 
southeastern agriculture. 

Changes in labor productivity of agriculture indicate to a large de- 
gree the extent of both capital- labor substitution and the adoption of 
yield- increasing technology. In 1958, for instance, output per farm 
worker was almost 90 percent above the 1947-49 average. This average 
rate of increase in farming productivity was more than three times the 
rate of increase in productivity in nonfarm sectors. A tremendous in- 
crease in the amount of capital used per worker has accompanied this 
rapid rate of change. The amount of capital per worker has been in- 
creased through a rapid transfer of capital among families in agriculture 
and the use of more nonfarm capital. Finally, the economic and technical 
changes in farming have been associated with a cost-price squeeze and 
relatively low aggregate levels of farm incomes. These income levels 
suggest increasing problems of capital accumulation and use of credit. 

The growth in agriculture differs from the growth in the rest of the 
economy in many respects. Several characteristics of agriculture which 
differ, in degree at least, from most nonfarm industries include: (1) a 
higher rate of technological change; (2) inelastic demand for its products; 
(3) the difficulty of controlling production; (4) the "rugged individualism " 
of farm operators; (5) the chronic high level of underemployment of labor 
in some regions; and (6) a high degree of risk and uncertainty. The 
critical problems associated with future agricultural growth are effi- 
ciency in resource use and levels of living. 

Problems of American agriculture arise from the growing interre- 
lations with the nonagricultural economy, technological innovations in 
agricultural production, and the changing structure of demand for our 
farm products in the United States and foreign countries. 

The current and prospective needs for adjustments within agriculture 



4 THE ECONOMIC GROWTH PROBLEM 

are great and well known. 1 The adjustments of agriculture to changes 
in its economic and technical environment are a continuing process, and 
probably these adjustment pressures and needs will continue in future 
decades. Since agricultural adjustments are made largely for relatively 
long-run periods because of specified use and fixed investments, farm- 
ers must be aided and guided toward making the right kinds of changes 
(cf. Chapters 21, 23, and 24). 

Considering some of the major trends that are occurring and are pro- 
jected for the future, attention must be focused more clearly on capital 
formation in agriculture (Chapters 2 and 3) and the adequacy of the cap- 
ital and credit structure of agriculture (Part III). Many people are of 
the opinion that the farm credit system for American agriculture is 
partly out of date, and that it should be adjusted to permit the guiding of 
changes that would foster an orderly development of our agricultural 
economy. Murray and Diesslin discuss this subject in Chapters 11 and 
13. Studies dealing with farm adjustments throughout the United States 
indicate that capital is a crucial limiting factor which prevents farm 
operators from obtaining desirable returns for their management, labor, 
and investment. 2 That is to say, from the standpoint of the individual 
farm or area, increased farm income depends largely upon the extent 
and effectiveness with which the farm firm can use additional capital. 

NATURE OF NATIONAL AGRICULTURAL GROWTH 

Any change in national economic growth requires adjustments in 
agriculture. Three broad types of farm adjustments generated by na- 
tional economic growth are discernible. They are: (1) demand for farm 
labor, (2) development and production of nonfarm inputs for use in agri- 
culture, and (3) demand for farm products. 

Such changes encourage adjustments in agriculture, and in a highly 
developed economy such as that of the United States, agriculture will 
generally be faced with a cost-price squeeze; this results because its 
position is declining relative to that of other industries. Further, the 
growth of inputs produced in nonfarm sectors increases the output from 



x The general problem and policies of American agriculture are discussed in detail 
elsewhere. For example, see Problems and Policies of American Agriculture, Iowa State 
University Center for Agricultural Adjustment, Iowa State University Press, Ames, Iowa, 
1959; Policy for Commercial Agriculture — Its Relation to Economic Growth and Stability, 
Joint Economic Committee Report, 85th Cong., 1st Sess., Nov. 22, 1957. Also, there are 
many articles in leading journals, and in college and other public and private agency reports. 

2 See, for example, J. Gwyn Sutherland, C. E. Bishop, and B. A. Hannush, "An economic 
analysis of farm and nonfarm uses of resources on small farms in the Southern Piedmont, 
North Carolina," N. C. Agr. Exp. Sta. Tech. Bui. No. 138, May, 1959; A. B. Mackie, E. O. 
Heady, and H. B. Howell, "Optimum farm plans for beginning tenant farmers on Clarion- 
Webster Soils," Iowa Agr. Exp. Sta. Bui. 449, April, 1957; E. T. Baughman, "Contributions 
of credit policy to financing needed farm adjustments and to transferring ownership of 
farms," Policy for Commercial Agriculture, op. cit., pp. 339-48; C. B. Baker and H. G. 
Halcrow, "Problems in agricultural reorganization," Problems and Policies of American 
Agriculture, op. cit., pp. 97-113. The above represent a few of the many references that 
could be cited here. 



THE ECONOMIC GROWTH PROBLEM 5 

agricultural resources (Chapters 6 and 7). This is one characteristic 
of a progressive economy. Well -developed economies are characterized 
not by how many, but by how few resources are employed in the primary 
industries. Consequently, 'as the national income or national product in- 
creases, the relative position of agriculture would be expected to decline. 

^The significance and extent of the adjustments resulting from the 
increasing importance of other industries relative to agriculture depend 
partly on future growth and changes in population, technology, innova- 
tions, government and firm policies, and other factors.^ When there is 
full employment in the economy, national economic growth tends to (a) 
encourage the substitution of capital and industrial products for farm 
labor and land, thus changing the input and cost structure of agriculture, 
and (b) to produce differential rates of change in the demand for farm 
and nonfarm products. 

Major adjustments will be required as a result of forces operating 
within agriculture. Age, education, and financial position of farmers, 
for example, significantly affect the adoption of technology and increases 
in the size of farms. This point is developed more fully in Chapters 20 
and 21. The internal agricultural adjustments are partly of a locational 
nature and result from changes in the competitive position of different 
regions in the production of different types of products. Since 1940 
there has been a noticeable trend toward specialized production in a 
number of farm products at both area and firm levels. The relative 
competitive position of agriculture in a given region of the United States 
results from (a) price relationships, (b) adaptation of physical resource 
endowments to changes in technology and markets, (c) ability to accu- 
mulate capital, (d) nearness to market, and (e) the advantage of special- 
ization or diversification of production. 

('The relat ive sign ificance of agriculture, in the United States economy 
can be pictured in terrnlnjfTJOTJuTaHori and percentage of national income 
since 1910. In 1910 about 35 percent of the total population of the United 
States was on farms.) This percentage had declined to 16.5 by 1950, and 
to 11.8 by 1958, and the proportion of the national income derived from 
agriculture declined at about the same rate. 

The proportion of the national income derived from agriculture was 
16 percent in 1910. This percentage had declined to 8 percent by 1950, 
and to 5 percent by 1958. If the 1975 population projections of 220 to 
230 million people for the United States materialize, the levels of farm 
population (8 to 10 percent) and farm income (3 to 4 percent) will con- 
tinue to decline. \ Farm population since 1940 has decreased relatively 
as well as in absolute numbers. Associated with this decline in farm 
population has been the decline in farm numbers. Data on changes in 
farm numbers are presented in Chapter 7, Table 7„5. 

sTotal farm output and the physical efficiency of resources used in 
farming have been increasing at a rapid pace. Farm output in 1959 was 
more than a fourth higher than it was in 1950. The 1958 output per unit 
of input was 23 percent above the 1947-49 average. 3 



3 Agricultural Outlook Charts 1960, USDA, Washington, D. C, Nov., 1959, p. 50. 



6 



THE ECONOMIC GROWTH PROBLEM 



Rapid adoption of output-increasing technologies, coupled with the 
nature of demand, have resulted in lower farm prices. ^Vhile average 
costs have been reduced, total costs have increased; since 1950, ex- 
penditures have absorbed a larger percentage of gross revenue. ( Since 
about 70 percent of gross revenues are used for production expenses, 
farmers are under constant pressure to maintain high levels of gross 
revenue. \ Further, the increased dependence on purchased factors of 
production has tied the a gri natu ral sec tor more closely to the rest of 
the economy. 

The rapid progress achieved in agriculture since 1940 has been as- 
sociated with major changes in the cost structure of agriculture. The 
dramatic nature~oTthese changes has been analyzed in a recent study. 4 
In 1958 the farm family labor input was less than half *the amount used 
during the 1930's. The total quantity of farm-owned capital had in- 
creased by one-third, while the use of purchased inputs and capital 
services purchased from the nonfarm sectors had increased by two- 
thirds (Table 1.1). 

Table 1.1. Indices of Agricultural Inputs, 1910-58 
(1947-49 = 100) 





Farm 


Farm-owned 


"Purchased" 




Years 


family labor 


capital 


inputs a 


Total 


1910-19 


148 


96 


58 


88 


1920-29 


149 


90 


70 


94 


1930-39 


139 


91 


70 


92 


1940-49 


115 


88 


93 


100 


1950-58 


79 


120 


112 


102 


1958 


64 


128 


117 


101 



Source: R. A. Loomis and G. T. Barton, Productivity of Agriculture, United States, 

1870-1958, USDA, Tech. Bui. 
a Includes both materials and services purchased from nonfarm sectors and rent and 

interest on nonfarm -owned capital. 

Farm family labor has declined while capital and purchased inputs 
have increased. As a result, each unit of farm operator and family labor 
now uses three times more capital and nearly four times the purchased 
inputs and capital services it used in 1930,(Figure 1.1). Related data 
are presented in Chapters 6 and 7. 

Changes in the averages overstate somewhat the changes occurring 
on commercial farms in many regions. CMuch of the labor resources 
withdrawn from agriculture has come from small farms with very small 
capital investments. Withdrawal of these farms would tend to increase 
the average size of farms even though no changes occurred in the larger 
commercial farms. , Substantial changes have occurred on commercial 



4 R. A. Loomis and G. T. Barton, Productivity of Agriculture, United States, 1870-1958, 
USDA, Tech. Bui. (In press.) 



THE ECONOMIC GROWTH PROBLEM 7 

farms, however. In 1959, for example, the value of farm capital on 
selected commercial farms ranged from 3-1/2 to more than 5 times 
the value in 1940 (Table 1.2)/ Expenditures in 1959 also were at 3 to 4 
times the 1940 level (Table 1.3). In general terms, somewhat more 
than half of these increases are associated with increases in costs. , 



Period 








1910-19 


Li 1 


I m 


1920-29 


Li $ 1 6 ° 


m fl B -~ 


1930-39 


% | | 65 


■t S 1 - : 


1940-49 





□ Farm owned capital per unit of 
farm operator and family labor. 

■ Purchased inputs per unit of 

HI farm operator and family labor. 



1950-58 



g i83 

180 200 



Inputs 
(Percent of 1947-49) 

Fig. 1.1. Agricultural inputs per unit of farm operator and family labor, 1910-58 
(1947-49 = 100). 

Our rapid growth in farm output and productivity is related to the 
technological revolution in agriculture and to the increased use of non- 
farm inputs. About 55 percent of the inputs used in agriculture come 
from nonfarm sources. 5 These nonfarm inputs have the following three 
important effects: 

1. Use of nonfarm inputs generally increases output per farm and 
in total. This is particularly true when shifting from animal to tractor 
power and when increasing the use of fertilizers and pesticides. How- 
ever, most types of nonfarm inputs tend to increase product per acre 
and per unit of livestock. 

2. The characteristics of nonfarm inputs impede commercial 
farmers in changing from production to nonproduction during short 
periods of time. Many nonfarm inputs represent capital investments 
for use over a number of years. Capital charges, depreciation and re- 
pairs on farm buildings, power, and machinery account for more than 
half of the annual nonfarm inputs in the United States. To a large extent, 
"fixed" labor resources are replaced by "fixed" machinery and equip- 
ment investments. Thus, even large-scale farms have a relatively low 
proportion of inputs that can be classed as variable. 



Loomis and Barton, op. cit. 



THE ECONOMIC GROWTH PROBLEM 



Table 1.2. 


Value of Capital Per Farm, Specified Types of Commercial 
Family-Operated Farms, 1940 and 1959 




; of farm 


Average value 


1959 as a 


Typ< 


1940 1959 a 


percent 
of 1940 



Dairy farms, Central Northeast: 
Total farm capital, January 1 
Land and buildings 
Livestock and equipment 

Hog-beef fattening farms, Corn Belt: 
Total farm capital, January 1 
Land and buildings 
Livestock and equipment 

Cash-grain, Corn Belt: 

Total farm capital, January 1 
Land and buildings 
Livestock and equipment 

Cotton farms, Black Prairie: 
Total farm capital, January 1 
Land and buildings 
Livestock and equipment 

Cotton farms (irrigated), 
High Plains, Texas: 

Total farm capital, January 1 

Land and buildings 

Livestock and equipment 

Southern Piedmont: 

Total farm capital, January 1 
Land and buildings 
Livestock and equipment 

Tobacco-cotton farms, North Carolina: 
Total farm capital, January 1 
Land and buildings 
Livestock and equipment 

Wheat-small grain-livestock farms, 
Northern Plains: 

Total farm capital, January 1 

Land and buildings 

Livestock and equipment 

Wheat-pea farms, Washington and Idaho: 
Total farm capital, January 1 
Land and buildings 
Livestock and equipment 



(Dollars) 



(Percent) 



9,600 
5,300 
3,400 


38,750 
20,550 
15,430 


404 
388 
454 


20,990 

14,220 

4,860 


75,420 
48,120 
21,100 


359 
338 
434 


31,470 

26,250 

2,900 


112,280 
93,930 
10,830 


357 
358 
373 


8,820 
7,240 


34,210 
28,420 


388 
393 


1,320 


5,320 


403 


24,120 b 

18,300 

4,900 


107,850 
96,300 
10,840 


447 
526 
221 


4,760 

3,670 

880 


20,430 

17,010 

2,920 


429 
463 
332 


6,770 
5,500 
1,080 


24,530 

20,000 

3,790 


362 
364 
351 


10,830 
7,230 
2,710 


57,610 
33,980 
16,840 


532 

470 
621 


35,970 

29,060 

4,620 


183,810 

155,000 

22,020 


511 

533 
477 



Source: Tabulated from studies of costs and returns by type of farm made in the 
Farm Economics Research Division, ARS. See USDA Info. Bui. 176, Revised, 
1959. 

a Preliminary. 



1944 data. First year of study. 



THE ECONOMIC GROWTH PROBLEM 



Table 1.3. Cash Expenditures for Specified Types of Commercial Family -Operated Farms, 1930-58 













Farms 












Dairy 


Corn Belt 


Tobacco-cotton 


Cotton 


Spring wheat 


Winter wheat 
















High 




Wheat- 














Black 


Plains, 


Wheat - 


pea 




Central 


Hog-beef 


Cash 


North 


Southern 


Prairie, 


Texas 


small grain- 


Washington 


Year 


Northeast 


fattening 


grain 


Carolina 


Piedmont 


Texas 


(Irri.) 


livestock 


and Idaho 












(Dollars) 










1930 


2184 


2962 


1876 




933 


852 




1776 




1931 


1704 


2125 


1523 




660 


717 




1095 




1932 


1340 


1755 


1244 




469 


533 




1077 




1933 


1346 


1506 


1134 




557 


667 




866 




1934 


1539 


1764 


1193 




648 


575 




887 




1935 


1661 


2544 


1494 




680 


650 




1439 


a 2865 


1936 


1798 


2089 


1671 




734 


768 




1042 


3423 


1937 


2149 


2661 


1936 




857 


1037 




1547 


3470 


1938 


2016 


2741 


1971 




722 


851 




1421 


3345 


1939 


2078 


3124 


2031 




786 


825 




1419 


3097 


1940 


2241 


3576 


2224 


a 1143 


861 


946 




1641 


3612 


1941 


2534 


4007 


2426 


1369 


870 


1053 




2044 


3896 


1942 


2874 


4652 


2717 


1757 


1130 


1232 




2448 


4916 


1943 


3219 


4967 


2897 


1890 


1260 


1399 




2844 


4938 


1944 


3873 


5355 


3359 


2487 


1402 


1623 


a 5707 


3181 


4891 


1945 


3954 


5728 


3519 


2662 


1448 


1618 


4387 


3478 


4674 


1946 


4308 


6911 


3998 


3423 


1785 


1869 


6130 


3695 


6093 


1947 


4830 


8225 


4511 


3493 


1808 


2711 


10,108 


4816 


7526 


1948 


5558 


11,102 


5045 


3536 


2021 


2914 


9864 


5497 


7363 


1949 


5175 


10,122 


5281 


3486 


1889 


3736 


11,982 


4999 


6462 


1950 


5409 


11,590 


5518 


3880 


1868 


2833 


10,067 


5117 


7170 


1951 


5804 


13,438 


5906 


4707 


2533 


3471 


13,403 


5888 


8533 


1952 


6140 


12,775 


6071 


4425 


2697 


3814 


14,476 


5317 


9753 


1953 


6110 


11,122 


6254 


4360 


2965 


4604 


14,415 


5365 


8895 


1954 


5964 


12,628 


6426 


4554 


2531 


3269 


14,698 


5181 


9532 


1955 


5844 


11,937 


6408 


4704 


2758 


3734 


15,391 


5536 


10,018 


1956 


5966 


11,341 


6464 


4508 


2362 


3085 


15,328 


5344 


10,413 


1957 


6600 


12,871 


6743 


3745 


2212 


3229 


13,239 


5264 


10,804 


1958 


7130 


14,842 


7092 


4185 


2425 


3491 


14,046 


5950 


10,988 



Source: Tabulated from studies of costs and returns by type of farm made in the Farm Economics 

Research Division, ARS. See USDA Info. Bui. 176. 
a First year of study. 



3. In general, use of nonfarm inputs increases earnings of the in- 
dividual farmer even in periods of low prices, as most nonfarm inputs 
have a high marginal productivity per dollar of increased expenses. 
Heady develops this point in Chapter 7. 

Because of these three effects, commercial farmers tend to strive 
for an expanded total output. Operators respond to favorable price and 
income relationships by (a) increasing the use of nonfarm variable in- 
puts, such as fertilizers and pesticides and (b) making new capital in- 
vestments to increase intensity of operations or to enlarge units for 
more efficient operation. More capital-intensive uses of land are 
encouraged. 

Many farmers lag in adopting new technology even under favorable 



10 THE ECONOMIC GROWTH PROBLEM 

income conditions because they lack knowledge about its effects; some- 
times they cannot or will not obtain needed finances, take the added 
risks, or acquire the necessary technical and managerial skills. A 
more detailed development of this subject is .presented in Chapters 20 
and 21. Adoption of new technology usually reduces costs per unit of 
output, but as indicated, it usually increases total output. Most farmers 
respond to cost- reduction opportunities by adding inputs to their existing 
stock of resources. The increased output will mean more income to the 
individual farmers. That is, each farmer responds to a horizontal de- 
mand curve, usually without realizing that the over-all increased output 
resulting from the widespread adoption of new techniques will eventually 
depress prices. But even if the consequences are foreseen, an individual 
farm operator who increases his output thus maximizes his returns. 

Once total output has expanded, it does not shrink when prices fall 
and costs rise. This phenomenon results because individual farmers 
usually cannot increase their net incomes by reducing output. 6 In some 
cases, a change in enterprises may increase net incomes. Farmers 
will quit farming only if their returns from alternative employment, 
plus the returns from salvaging investments in "fixed resources," ex- 
ceed their expected returns from farming. If they liquidate machinery, 
livestock, and equipment in order to take nonfarm employment, they will 
lose heavily on their original investments. Consequently, most farmers 
continue in the hope of more favorable future developments. Farmers 
who liquidate will sell to others who will buy the resources at lower 
costs; and in the short- run the new owners are likely to use them at the 
same or higher levels of intensity. 

Meanwhile, farmers who have not adopted the new improvements 
have acquired more knowledge. Most important, they usually find that 
the marginal productivity of additional capital, even at lower product 
prices, is still high enough to yield a net return. For the individual 
farmer who is operating a going concern, the adoption of these techno- 
logical developments will likely continue to pay. Many farmers are 
only partly adjusted to current technology and prices. The marginal 
returns of another insecticide application or another 40 acres of crop- 
land, for example, can be very high. Other farmers can increase in- 
comes through major changes in their farming systems. An analysis 
by Johnson and Bachman indicates the returns per dollar of added ex- 
pense that farmers in eight typical situations would receive by adopting 
systems recommended by research economists. Price ratios of 84 to 
90 were used in these studies. The calculated net returns per dollar of 
add ed expense, including interest and depreciation, ranged from $1.50 
to $2.72. 7 



6 G. L. Johnson, "Supply function — some facts and notions," Agricultural Adjustment 
Problems in a Growing Economy, E. O. Heady, H. G. Diesslin, H. R. Jensen, and G. L. 
Johnson, eds. Iowa State University Press, Ames, Iowa, 1958, pp. 74-93. 

7 S. E. Johnson and K. L. Bachman, "Recent changes in resource use and in farm income," 
Problems and Policies of American Agriculture, Iowa State University Center for Agri- 
cultural Adjustment, Iowa State University Press, Ames, Iowa, 1959. 



THE ECONOMIC GROWTH PROBLEM 11 

How have these changes in technology and prices of resources af- 
fected capital use? How are they affecting the capital and credit prob- 
lems of American agriculture? These questions are analyzed in 
Chapters 6 and 7. 



ECONOMIC GROWTH AND FARM SIZE ADJUSTMENT 

Much of the economic growth problem in agriculture is related to 
the development of sizes of farms that will effectively utilize modern 
technology and production methods. American agriculture is charac- 
terized by a wide diversity in the nature and size of its farms (see 
Chapter 4). Marked adjustments have occurred in numbers and sizes 
of farms, but rapid changes have also occurred in the sizes of farms 
needed to utilize effectively the developments in machinery, equipment, 
and other technology. 

In broad outline, the total number of farms and the number of com- 
mercial farms have declined progressively since 1930. The number of 
part-time and residential farms increased until 1950. Since 1950, the 
number of these noncommercial farms has declined also. 

Since 1940 the number of commercial farms has declined rapidly. 8 
The most rapid decline has been in the small-scale commercial farms 
(Economic Classes V and VI) which produce less than $2,500 worth of 
products for sale at 1954 prices. At the other end of the size scale, 
numbers of Classes I and II farms, or those that produce over $10,000 
worth of farm products for sale at 1954 prices, have steadily increased. 
Numbers of farms in Economic Class II increased until 1950, but have 
been declining since that time. 

Some reasons for these trends in the context of a growing and pros- 
perous nonfarm economy become apparent if one considers how much a 
farmer must sell to obtain a specified income. Recent studies of re- 
source use under projected prices indicate that in several type-of- 
farming areas sales totaling more than $12,000 would usually be needed 
to provide incomes of $3,500 to operator and family labor. 9 From the 
standpoint of volume of sales, these farms were generally comparable 
to the farms in Economic Class II. The projected income of $3,500 is 
more than $500 below the median earnings of semiskilled workers in 
industry. Further, nonfarm earnings are increasing each year, and by 
1975 they are expected to increase nearly 50 percent. 

Capital investments on most of these farms ranged from about 
$30,000 to more than $100,000. Average investments in 1954 for Eco- 
nomic Class n farms in selected areas and by types of farms are shown 
in Table 1.4. Investments for selected farms ranged from $50,000 to 



8 J. V. McElveen, Family Farms in a Changing Economy, USDA Info. Bui. 171, Mar., 
1957, p. 19. 

9 J. M. Brewster, Farm Resources Needed for Specified Income Levels, USDA Info. Bui. 
180, 1957. 



12 THE ECONOMIC GROWTH PROBLEM 

$100,000. In terms of 1960 dollars, these investments would be somewhat 
higher because of the higher prices of land, machinery, and equipment. 

Table 1.4. Capital Investment on Class II Farms 

Average value of investment 
Type of farm and area 1954 

(Dollars) 

Cotton farms: 

Eastern Coastal Plains 45,887 

Mississippi-Alabama hilly area 58,173 

Delta area 53,685 

High Plains area 64,005 

Western irrigated area 67,270 

Wheat farms: 

Central Oklahoma-Kansas 89,190 

Red River Valley 71,716 

Washington-Oregon 102,304 

Dairy farms: 

Gulf Coast 44,267 

Nashville Basin 48,304 

Northern Lake 48,308 

Livestock farms: 

Central Corn Belt 73,035 

Eastern Corn Belt 69,275 

Western Corn Belt 68,004 

Source: Data tabulated from the following U. S. Census-ARS Special 
Reports: "Cotton producers and cotton production," by R. B. 
Glasgow; "Dairy producers and dairy production," by P. E. 
McNall; "Cash grain and livestock producers in the Corn Belt," 
by E. G. Strand; and "Wheat producers and wheat production," by 
A. W. Epp. 

Adjustment in size of farm is a major problem connected with the 
economic growth of U. S. agriculture. In 1954 only about 20 percent of 
the commercial farms had a volume of sales of $10,000 or more. Nearly 
60 percent had a volume of sales under $5,000. 

The economic pressure for farm expansion is lessened in different 
ways because of the circumstances under which farmers operate. For 
example, if a farmer has an excellent equity position and is a good 
manager, he will not risk much while expanding his operation, either by 
land acquisition through purchase or rental and/or more intensive pro- 
duction. But a farmer who operates a relatively small farm and who 
has very little capital assets has a small base from which to expand 
and/or adopt newly developed technologies of production. This type of 
farmer may be an excellent manager, but he cannot risk incurring a 
large indebtedness. Even if he wanted to expand his business, would 
credit agencies be willing to see him through his major adjustment 
period? This problem is discussed by Hendrix and Lanham in Chapter 



THE ECONOMIC GROWTH PROBLEM 13 

14. A decision to finance this type of farmer is one of seeing him all 
the way through, perhaps with a complete financing "package deal." 
This idea is advanced and analyzed in Part III. If this financial help 
cannot be obtained, such a farmer must resort to dissipating his savings; 
thus he cannot set aside reserves for equipment replacement and build- 
ing repair in order to remain in business. The third type of farmer can 
make the financial adjustments, but is reluctant to incur indebtedness 
and/or adopt the latest technologies of production. Coutu and Lindsey 
discuss this type of individual who has a strong "aversion to change" in 
Chapter 21. Perhaps this type of farmer should give strong considera- 
tion to some land rental arrangement. The big question here is whether 
such farmers can make capital-oriented adjustments from future gross 
revenues. 

Farmers have very little control over prices paid for purchased 
factors of production. Many external forces determine these prices, 
such as: wage levels, the fiscal and monetary policy of our government, 
the costs of raw materials that are used to manufacture the input, trans- 
portation costs, and the like. The farmer is faced with continually in- 
creasing prices for these factors of production, and in addition, he is 
buying more of these inputs. Such a trend is a natural result of the 
rapid change to a highly scientific, mechanized type of agriculture. The 
combination of these two trends results in greater outlays for these pur^ 
chased inputs. At the same time, increased output forces down agri- 
cultural product prices, and thereby, gross farm incomes. The total 
demand for farm products can be expected to increase with population, 
but at a much slower rate than the increased demands for nonagricul- 
tural products. 

Farmers, and especially southern farmers, find themselves in a 
difficult situation. In the past, farm operators could plan to expand 
their business slowly, mainly from net revenues. The main line of 
credit was short-term, thus enabling farmers to maintain a high equity 
ratio. Conditions have changed because of technological progress, 
coupled with unfavorable price-cost relationships. As a result, needs 
for fixed intermediate- and long-term commitments are increasing. 
The problems of credit needs and credit availability are discussed in 
Part IH and Chapters 25 and 26. 



ECONOMIC GROWTH, FARMERS' VALUES, AND EDUCATION 

How a farmer looks upon change depends upon his values, the re- 
sources at his command, and his ability to use these resources to ac- 
commodate change. Discussions in Chapters 19 through 21 are relevant 
to this subject. Problems arise because farmers react differently to 
growth problems, and growth affects different groups of farmers differ- 
ently. It is evident that great disparities arise among the different 
groups of farmers. The farmer who was considered to have a good- 
sized farm and was obtaining a desirable level of income in 1945 or 



14 THE ECONOMIC GROWTH PROBLEM 

1950, might have been operating a marginal farm and just eking out a 
subsistence level of living in 1959. On the other hand, operators who 
managed relatively small-sized units in 1945 might have been operating 
a farm in Economic Class I or II in 1959. Such a situation is more of 
an exception than the rule. It is more customary to see large commer- 
cial farms getting larger and their numbers increasing, and the number 
of relatively small-sized farms decreasing. 

The general growth of our economy calls for continuing improve- 
ment in the quality of human resources, thereby increasing their alter- 
natives for employment in nonagricultural jobs; and for those who con- 
tinue to operate commercial farms, a greater opportunity to adjust to 
technological and economic changes. Discussions in Chapters 4, 22, 
and 23 develop this point more fully. Many farm operators, however, 
were not fortunate enough to enter farming at the "right" time. These 
less fortunate commercial farmers were unable to build a sufficient 
equity base to obtain enough intermediate- and long-term credit for 
expanding their farm business. Then, too, a longstanding philosophy in 
farming has been that it is "bad" to be in debt, and that farm loans 
should be fully amortized (cf. Chapter 20). Of necessity, some of these 
attitudes are changing, e.g., a greater acceptability of land rental as a 
sound management practice, as in Great Britain. 

An important element of economic growth is that there be enough 
labor to supply an enlarging industry. Agriculture has served this as- 
pect of economic growth well throughout our history. However, this 
outmigration of labor from agriculture is a form of capital export to 
other sectors. Those who leave agriculture for nonfarm jobs are usually 
the better-equipped young adults who have the ability to farm success- 
fully. What type of capital investments should our society make in 
training these farm youngsters so that their productive potential will be 
fully developed regardless of the work they finally obtain? Mackie 
answers this question in Chapter 22. 

Many farmers who cannot make a desirable living in agriculture are 
at a crossroad. They might be able to reorganize their farm business 
if capital were provided for the needed adjustments. On the other hand, 
such farmers are faced with sunk assets that cannot readily be con- 
verted into assets of a more liquid form; hence they appear to be help- 
lessly frozen to agriculture (cf. Chapter 14). 

Migration of labor out of agriculture results directly from a lack of 
economic opportunities for people in agriculture. In order to operate a 
farm in the future, increasing amounts of capital will be needed (Chapter 
5). Our farm credit system must be set up to carry beginning farmers — 
those who possess the attributes for success — over relatively long peri- 
ods; otherwise, farming will truly become an occupation dependent upon 
inheritance and/or the "right" marriage. We should not overlook the 
strong possibility that many of our family farms may incorporate in 
order to finance adjustments. Credit managers who can think in terms 
of financing the farm business over a long period under sound farm 
management, rather than financing a particular farm enterprise, may 



THE ECONOMIC GROWTH PROBLEM 15 

play an important role in developing a sound agriculture that can with- 
stand periods of "shock." This point is emphasized by Murray, 
Diesslin, et al. in Part HI. 

Vertical integration or contract farming has been advocated by some 
as a desirable device to minimize risk and uncertainty and psychological 
factors retarding economic growth of special groups of farmers. A de- 
tailed discussion of this subject is presented in Chapter 8. In general, 
the over- all objective of the integrator is to obtain an expanded market 
for his products and/or services; hence, we can expect these firms to 
be strong advocates for rapid adoption of technological innovations by 
farmers. Since the farmer is constantly pushed to increase efficiency 
in production, he will continue to make these types of capital invest- 
ments. Of course, there is the danger of too rapid capital investments, 
which can weaken the financial structure of the farm business and make 
the farmer greatly vulnerable to unfavorable price-cost relationships. 

On the product side, firms are demanding greater standardization 
of products through specification buying. Various arrangements are 
being developed to insure processors and marketing firms desired vol- 
umes of the "right" kinds of farm products. This trend has further in- 
tensified the need for farmers to farm more scientifically and in most 
cases to increase the capitalization of their businesses. This develop- 
ment in the growth of our nation has widened the gap between the con- 
sumer and the farmer. Usually, these integrated production-marketing 
arrangements provide needed capital along with management assistance. 

The attitudes of farmers, the problems of adequate education for 
farm people, and problems in capital acquisition are particularly vital 
aspects of economic growth from the standpoint of capital and credit 
problems. Part IV and Chapter 24 are devoted to these problems. 

Another phase of education is an increased research effort to ana- 
lyze the economic growth problem in agriculture, and particularly the 
problem of use of capital and credit. Farm adjustment research con- 
siders the restrictive effects of capital on farm income. However, there 
are many opportunities to conduct more comprehensive studies that 
would indicate the productivity of capital used in different forms in dif- 
ferent farming systems in the major farming regions of the nation. 
Tolley presents his views on needed research in this area in Chapter 27. 

Such research and the educational programs based on these research 
results would enable farmers and those in a position to extend farm 
credit to make more intelligent decisions on the extent of reorganization 
possible and the level of resulting incomes that could be expected. This 
credit-centered research could also point the way for needed changes in 
the farm finance structure to accommodate orderly adjustments by the 
nation's commercial farmers. In many instances, such research would 
more clearly help low-income farmers analyze their own opportunities 
for continuing in agriculture as compared with alternative forms of 
employment. There is a continuing need for research to determine how 
capital already committed to farming, and capital from other sources 
that may be committed to farming, can be utilized more efficiently so 



16 THE ECONOMIC GROWTH PROBLEM 

that the returns will compare favorably with returns from other forms 
of investment. Such research should include the effects of investment 
on farm output and rates of aggregate investment consistent with the 
growth in output needs. This information will be helpful in making an 
intelligent determination of how much investment can be restored to 
agriculture relative to the rest of the economy. 

Other studies that deal with attitudes of farm families toward the 
use of credit would help our educational workers and credit representa- 
tives to know their clients better, and hence would aid in breaking down 
barriers to more effective use of outside capital by the farm firm. Part 
V is concerned with the above-mentioned considerations. 



NATURE OF SOUTHERN AGRICULTURAL GROWTH 

While the Southeast appears to have lost its competitive position in 
the production of cotton, it seems to have gained in the area of livestock 
production. The changes that have occurred have forced southern farm- 
ers to acquire more capital, land resources, technical knowledge, and 
managerial ability. Since most small-scale and low- income farms are 
in the South, the needed adjustments have been more difficult to achieve 
in this region than elsewhere. 10 By the same token, more people in 
southern agriculture have been affected by the economic pressures ex- 
erted by structural changes than elsewhere in the country. The prob- 
lems of small farms, lack of education, low income, inadequate capital 
resources, and a surplus of farm labor make the job of agricultural and 
resource development in the Tennessee Valley and Southeast very difficult. 

According to the 1954 Census of Agriculture, there were 4,783,021 
farms in the United States. Of this total, 30 percent, or 1,455,404, were 
part-time and residential farms, and 26 percent, or 1,225,775, were 
small commercial farms— Economic Classes V and VI. Thus in 1954, 
56 percent of all farmers received gross farm incomes of less than 
$2,500. 

Twenty-six percent of all farmers in the United States in 1954 had 
gross farm sales of less than $2,500, with farm income exceeding non- 
farm income, and with operators working less than 100 days off the 
farm. Of these 1.2 million farms, 63 percent were in the South. Of the 
remaining 37 percent, only 5 percent were in the West. Except for 
southern Missouri, parts of the Middle West and Northeast, and the 
cutover lands of the Great Lake States, the low-income farms are 
largely located in the South. In 1954 these 1.2 million farmers had 
gross farm sales of $1.8 billion — or 7 percent of all farm products 
sold in the United States. Thus, less than half, or 44 percent, of all 
farmers had gross farm sales of more than $2,500, and they produced 
91 percent of the farm products. In the TVA region, only 15 percent of 



10 A. B. Mackie and E. L. Baum, "Programs for commercial farmers with low incomes, 
Problems and Policies of American Agriculture, op. cit., pp. 406-29. 



THE ECONOMIC GROWTH PROBLEM 17 

the farmers had gross farm sales of $2,500 or more in 1954, and these 
farmers produced 68 percent of all farm products. 

Within the South, the highest proportion of the low-income farms 
are in the southeastern and Delta cotton areas and the general farming 
areas of the Appalachian Mountains. In these areas, nearly half of the 
commercial farms are small-scale units. Many older people and many 
people with low levels of education live on these farms, as indicated by 
Mackie in Chapter 22. 

There is general agreement that the cause of low farm incomes is 
lack of adequate productive resources, especially land, capital, and in 
many instances educational training. Ownership and/or control of cap- 
ital and land, along with improved levels of education, are thus prereq- 
uisites for production and, hence, farm income. Of course, management 
of productive resources is important with respect to the level of produc- 
tion efficiency, once the control of resources has been acquired. 

It has been stated that the causal relationship of low income and low 
capital per worker has been the primary reason for the existence and 
persistence of low farm incomes. That is, low incomes remain exces- 
sively low largely because of the low level of capital available per 
worker, and the inadequate amount of capital is largely a consequence 
of low income. Therefore, low-capital and low-income farms in his- 
torically less prosperous farming regions, such as in the Southeast and 
the Tennessee Valley, tend to remain inefficient and low-producing units. 

Historically, it has been shown that since 1870 gross capital forma- 
tion in agriculture has been very closely related to gross income. 11 
This remarkably consistent relationship of gross capital formation to 
gross income emphasizes the importance of the latter, both as a source 
of new capital and as an incentive for investing new capital. Thus, we 
could conclude that the prospect for acquiring new capital by Classes V 
and VI farms would be very dark indeed. There are indications, how- 
ever, that a family's present net worth has very little relationship to 
its capacity to use capital efficiently and to save when it has a good 
opportunity to do so. 12 

The number of farms in the South is expected to decrease at a 
greater rate than in other regions. 13 Associated with increasing em- 
phasis upon livestock production, there is expected to be a gradual shift 
in the pattern of land use. An increased acreage of cropland is expected 
to be pressed into forage production. Grain production should increase 
some, but not in direct proportion to the increase in livestock produc- 
tion. Two factors are affecting and will continue to affect the rate at 
which grain production will be increased in the region. These are (1) 
the availability of and access to midwestern grain that may be brought 
into the region at economical rates by barge transportation, and (2) the 



11 Alvin S. Tostlebe, Capital in Agriculture: Its Formation and Financing Since 1870, 
Princeton University Press, Princeton, N. J., 1957, p. 98. 

12 Ibid., pp. 149-51. 

13 J. M. Brewster, "Long-run prospects of southern agriculture," Southern Econ. Jour., 
Vol. 26, No. 2, Oct., 1959, pp. 134-40. 



18 THE ECONOMIC GROWTH PROBLEM 

development of high-yielding forages and forage fertilization in the 
southern region, which makes some livestock production possible with 
a minimum grain requirement. 

If the TV A region and southeastern agriculture is to achieve the 
necessary and desirable adjustments in the years ahead, the capital and 
credit needs should be appraised, and the current credit facilities ex- 
amined to determine whether they will meet the ever-increasing capital 
needs of the future, as suggested in Part III. 



Chapter 2 



R. G. F. SPITZE* 

University of Tennessee 



Determinants of Capital 
Formation— Conceptual 
and Factual Considerations 



A GOOD UNDERSTANDING of the capital and credit problems in 
a changing agriculture is secured through a recognition of the 
determinants of its capital formation. The purpose of this 
chapter is to provide a conceptual and factual background for the capital 
formation process in American agriculture against which the specific 
research findings and problems of farm capital acquisition will be sub- 
sequently explored. 

This presentation has been divided into three sections: (1) a review 
of the meaning of capital and the process of capital formation; (2) iden- 
tification of the sources of farm capital and an examination of the rela- 
tive importance of these sources; and (3) a brief description of the 
problems considered to be of primary importance in the farm capital 
formation schema, considering the above theory and experience, and in 
connection with some current research. 



PROCESS OF CAPITAL FORMATION IN AGRICULTURE 



Meaning of Capital 

Used in production. Probably the most common definition of capital 
is, simply, a tool of production. Such a meaning is concise and com- 
municable; furthermore, it appropriately designates one of the prime 
characteristics of capital, namely, the use of something in production. 
There is little confusion about this definition except with reference to 
aggregations of assets. At times an accumulation of financial assets or 
of unused stores of equipment are included in a tally as capital. To be 
sure, both are savings, but savings are not synonymous with capital. 
Herein lies the basic fallacy of mercantilism. 1 

The differentiation between capital and financial assets is relatively 
simple, but a separation of unused capital goods from true capital is 
difficult, particularly at the firm level. Suffice it to recognize here, 



♦Subsequently, Associate Professor of Agricultural Economics, University of Illinois. 
1 Thomas Mun, "England's treasure by foreign trade," reprinted in Masterworks of 
Economics, L. D. Abbott (ed.), Doubleday & Company, Inc., Garden City, N. Y., 1947, p. 26. 

19 



20 R. G. F. SPITZE 

however, that substantial amounts of unused goods in the form of land, 
equipment, and buildings on the farms across this nation, though con- 
sidered wealth, never really enter the wealth-producing stream as 
capital , and hence contribute nothing to raise a depressed level of living. 
Thus, the simplified definition of capital (tool of production) does imply 
the important characterization of use in further productive effort. 2 On 
the other hand, it also erroneously implies that all capital takes a phys- 
ical form to be used by the hand of, but apart from, man; furthermore, 
it leaves the origin of capital untold. Capital does not seem to have a 
distinctive form, but rather is distinguished by purpose of use. 

Some useful differentiations are included in the following portion of 
an outline designed to identify capital: 

I At the most general level, phenomena are either human or nonhuman 
environment. 

A. Within this environment, phenomena are either economic (used 
for satisfying man) or those not presently useful. 
(1) Within economic phenomena, goods and services are either 
produced by man's efforts or not produced (such as the sun's 
radiation). 

(a) Within produced goods and services — if indeed further 
delineation can be made — items are used for consump- 
tion, or for further production, namely CAPITAL. Its 
form is not distinctive. 

Results from past production. A re-examination of the traditional 
tripartite factors of production as either land, labor (including manage- 
ment), or capital is in order. First, why was land separated from cap- 
ital? Possibly the heritage of the ancestral physiocrats was too strong. 
If all wealth rises from the soil like geysers erupting from the bowels 
of the earth, then indeed, land has a distinct logical category. But is 
land any more distinct from capital as a factor of production than is 
livestock? 

Land, as used since the beginning of farming, has been a produced 
good — produced by the endless human toil of discovery, combat against 
hostile elements, claiming, clearing, preparation, and painstaking im- 
provement. Even the "free" distribution of land in the homestead grants 
was in recognition of such effort as one of the conditions for title. Thus, 
perhaps the last vestige of physiocracy should be wrested from produc- 
tion theory and land should take its place as an integral part of a capital 
base, subject to the same economic principles of acquisition and use as 
other capital goods. 3 

But what is the line of demarcation between labor and capital? Is 
capital always a physical good in the hand of labor or management? 



2 Probably recognized in true perspective first by E. V. Bohm-Bawerk in his Positive 
Theorie des Kapitals. See English translations in S. H. Patterson, Readings in the History 
of Economic Thought, McGraw-Hill Book Co., Inc., New York, 1932, pp. 353-78. 

3 Alfred Marshall, Principles of Economics, 8th ed., Macmillan & Co., Ltd., London, 
1946, Book IV, p. 144. 



DETERMINANTS OF CAPITAL FORMATION 21 

Certainly these are crucial contemporary issues in capital theory which 
need clarification. A related theoretical dilemma plagued political 
economy for years — namely, the labor theory of value representing 
labor as the sole source of economic value. Remnants of this postulate 
may still survive to confuse the above question. 

The traditional distinction between capital and labor is apparently a 
recognition of the "natural class" differences between human and non- 
human elements, a difference not so clear in the production process. 
In addition, the traditional distinction between consumption and produc- 
tion, or investment, is whether an economic good or service goes the 
route of direct human use or the route of use in a production process. 
Perhaps a more accurate representation of consumption is maintenance 
of labor and management. 

A unique part of consumption vital to both labor and management is 
knowledge, both technological and general. Knowledge certainly origi- 
nates from past productive effort, and is indeed used to further produc- 
tion. Improvement in knowledge is hardly mere maintenance; labor and 
management could continue at a given level of production without it. 
One important means for improving the productivity and level of living 
of many farm people is that of their learning about capital use and pro- 
duction technology, alternative skills and jobs, and even political and 
social organization (cf. Chapters 4, 22, and 23). These uses of past 
production for improved labor and management, though commonly termed 
consumption, seem clearly to possess the afore -identified characteris- 
tics of capital. 4 

Saved from consumption. A recognition that the raison d'etre of 
production (or income) is partly consumption leads to a final prime 
characteristic of capital, namely, a rescue of past production from 
consumption. If all production is consumed (used for maintenance), the 
chances for capital formation are negligible. Economic goods not so 
consumed are indeed saved from consumption, but all goods saved do 
not become capital. At both the micro- and macro-levels, saved pro- 
duction can terminate in deterioration, obsolescense, or nonuse. 

A definition of capital proposed . Could a working definition of cap- 
ital for these discussions on capital problems of agriculture now be 
hazarded? Capital is produced goods and services saved from con- 
sumption (maintenance and direct satisfaction of man) and used by, or 
as a part of, the human agent in further production. 5 The difficulty of 
separating the use of goods and services as consumption for labor and 
management on one hand and as capital (education) for improvement in 
the agent on the other is again emphasized. However, this distinction 



4 M. Abramovitz, Resource and Output Trends in the United States Since 1870, Occasional 
Paper 52, National Bureau of Economic Research, 1956. 

5 The combined meanings of capital as offered by two contemporary theorists approximate 
this definition though each seems to leave out an important and different aspect. K. E. 
Boulding, Economic Analysis, Revised ed., Harper & Brothers, New York, 1948, pp. 654f; 
P. A. Samuelson, Economics; An Introductory Analysis, 3rd ed., McGraw-Hill Book Co., Inc., 
New York, 1955, pp. 40f. 



22 R. G. F. SPITZE 

seems vital enough to the future economic well-being of the farm popu- 
lation to advance it. To consider improvement in the human agent as 
capital seems most functional when the investment is made by a firm, 
by individuals for themselves, or by the general public. Such expendi- 
tures for children by a family or local government seem impossible to 
handle functionally except as consumption for maintenance, discharge 
of responsibility, and enjoyment. 

Capital formation itself can be viewed as either net or gross. 
Though all capital is product saved from consumption and used in fur- 
ther production, an important portion of it replaces each time the pre- 
viously existing capital that has been "used up," has depreciated, or 
that has otherwise lost its value as a productive agent. Thus all savings 
actually being transferred into productive use are considered gross 
capital formation; that portion of the gross capital which adds to the 
total value of the capital base is net capital formation. 



Capital Formation Process 

The level of capital formation in an economy, as now defined, is 
dependent upon certain processes: production of goods or services (for 
both direct enjoyment and as intermediate products); an excess of such 
production over consumption (savings); and utilization of this saved 
product in further production (investment). 6 A failure at any stage can 
thwart the capital formation process. A closer examination of certain 
segments of the capital formation process is presented below so as to 
secure a better understanding of the farm capital problems. 

Savings process and the farmer . Generally, production or income 
can be viewed as terminating in either consumption or savings. 7 They 
are complements for each other. The relevant question, then, is: What 
determines the size of either? Few questions have plagued the economic 
theorists more. However, the preponderance of evidence seems to point 
to consumption as the independent element — a propensity to consume. 
What is not consumed is savings, a residual. 8 Numerous factors, such 
as (1) expectations of future price levels and earnings, (2) cultural her- 
itage, and (3) past experience of consumption, affect this tendency to 
consume, but probably the dominant factor is the level of income or 
production. Viewing the relation of individual earning and spending 
units, the higher the income, the smaller the proportion of income 



6 The effort here is not to offer a complete, thoroughly integrated, and fully documented 
theory of capital formation; such far exceeds the needs of, or space allotted to, this discussion. 
It might be simply indicated that the following factors, in addition to amount of capital, affect 
production: quality of original resources, level of knowledge and technology, values of popu- 
lation, stability of socio-politico-economic system, and historic chance. 

7 A third alternative is public taxation and expenditure which can affect the level of eco- 
nomic activity and, hence, capital formation. However, production and income here are 
exclusive of taxes, over which the private sector, individually , has little control. 

8 J. M. Keynes, General Theory of Employment, Interest, and Money, Macmillan & Co., 
Ltd., London, 1936, Books I and III. 



DETERMINANTS OF CAPITAL FORMATION 23 

consumed. So much income is "needed" to maintain labor, management, 
and family replacements and to achieve the current socially acceptable 
level of living; only then do affluency and excess income appear. 

Thus, farmers' potential for capital formation or savings is sub- 
stantially influenced by their levels of income. Farmers' incomes are 
low by comparison with most other producing units in the economy, as 
has been pointed out in Chapter 1. Low income not only hampers the 
formation of capital goods, but also that capital which takes the form of 
education and technology. What is most surprising is the magnitude of 
the capital formed in agriculture in spite of the dearth of savings poten- 
tial. This herculean feat among farmers calls for a modification in the 
usual concept of the propensity to consume. Evidence points to a tend- 
ency of lower consumption by farm earning units at given levels of in- 
come when compared with nonfarm families. 9 Due to divergent values, 
unique social environment, or perhaps investment and replacement ob- 
ligations, farmers' decisions on allocation of income result in a higher 
savings rate. However, it is doubtful that such a practice can offset the 
low levels of farm income. Agriculture may well have to look to non- 
farm sources of saved production for a part of its needed future capital. 

Availability of savings to agriculture . A second aspect of the capital 
formation process important to agriculture is the availability of savings 
for use as farm capital. Savings must precede capital formation, but it 
does not follow that the investor must be the source of savings. The 
saver may be unwilling or unable to use his savings for capital, yet 
willing to allow others to use these savings if paid for foregone liquidity 
and for risk. The separation of saver and investor is much less prev- 
alent in farming than in the urban, industrial economy. The savings of 
nonfarmers are certainly a potential source of farm capital. Further- 
more, during the life cycle of the farm family, the period of highest 
capital needs coincides with the period of highest consumption needs 
and lowest income. Conversely, as savings accumulate over the period 
of active farming, the possibilities for profitable use of increasing 
capital diminish. 

Existence of uncommitted savings within or outside the farming 
segment, however, does not automatically guarantee its availability to 
the farm operator. Apart from the question of the comparative mar- 
ginal net productivities of capital in farm and nonfarm use, which is 
beyond the scope of this analysis, there is the vital question of the route 
that attracted savings must travel to get to agriculture. The saver and 
farm investor could negotiate directly; yet the relative isolation of the 
farm operator from the mass of potential lenders certainly reduces the 
availability of savings to the farmer as compared with the urban entre- 
preneur. Of course, this is the purpose of financial institutions — banks, 
insurance companies, and finance corporations. 

Until recently, institutional credit sources have tended to be urban 



9 Agricultural Statistics, 1951, USDA, Washington, D. C, p. 599; Statistical Abstract of 
the United States, 1953, U. S. Dept. of Commerce, Washington, D. C, p. 290. 



24 R. G. F. SPITZE 

in location, ownership, and outlook. Even farm savings not invested 
directly, such as those of older farmers, must be channeled to other 
farm users via these same urban businesses. Furthermore, the rapid 
emergence of the mutual fund and industry-wide retirement program 
may well tend to carry savings even farther from agriculturally- 
oriented institutions. The availability of either farm or nonfarm sav- 
ings to supply the future capital needs of agriculture is restricted to 
the extent that the credit institutions are (1) not readily accessible in 
location, (2) unfamiliar with the individual farmer's enterprises and 
organization, (3) unduly fearful of farming risks, or (4) unwilling to 
arrange loan terms suited to the needs of farming. 10 

The investment effort and the farmer. Capital is not formed until 
savings are transformed into productive goods. This third phase of the 
capital formation process raises another question pertinent to agriculture: 
Will the farmer seek out and invest all of the credit that might be prof- 
itably used in combination with his labor and management? 

The saver prefers to keep his funds in a safe but liquid form, unless 
he can get a return commensurable to the degree of nonliquidity and 
risk coincident with lending. However, the payment required to satisfy 
this desire does not appear to be very high for normal investment out- 
lets. For the borrower to be able to appropriate the savings with some 
given cost, there must be (1) knowledge about the role and use of credit 
in an enterprise economy, (2) understanding of the production process 
to be used in employing the additional capital, (3) possibility of enhanc- 
ing net productivity enough by the use of borrowed capital to cover its 
cost, the risk, and a minimum desired margin of added income (affected 
by effective demand for a product), and (4) willingness to accept the 
uncertainty and any stigma attached to indebtedness. Only when these 
conditions of lender and borrower are fulfilled will capital be formed. 

Aside from the question of the marginal value productivity of capital 
in farming today — overshadowed by inelastic product demand, under- 
employed labor, inflated factor costs, and other issues beyond the scope 
of this analysis — a relevant concern is the adequacy of farmers' knowl- 
edge and necessary credit decisions for actual capital formation in ag- 
riculture. This important problem is discussed further in Chapters 15, 
16, 20, 21, and 23. To the extent that farmers do not consider credit to 
be a satisfactory tool of production, that their knowledge of credit sources 
and use is deficient, and that their beliefs about indebtedness, risk- 
bearing, and good management are incompatible with credit expansion, 
farm capital formation can certainly be thwarted. Even farmers' beliefs 
about the merit of education and personal enlightenment can affect the 
expenditures made to better the educational opportunities for their 
children (cf. Chapters 4 and 22). The credit and capital problems in 
agriculture may well be shortcomings in farmer demand rather than 
deficiency in credit supply. 



10 H. G. Diesslin, "Effect of urban and industrial development on agricultural finance,' 
Jour. Farm Econ., Vol. 40, Dec, 1958, p. 1149. 



DETERMINANTS OF CAPITAL FORMATION 25 

Research, technology, and inheritance . Capital formation generally 
follows the trail-blazing path of research and new technology. Since 
consumers derive less satisfaction from additional units of given goods 
and services, a prerequisite of any continued increase in production and 
capital formation is the creation of new goods and services. Further- 
more, since demand for the farmer's product is highly inelastic both 
price- and income-wise, more inputs are hardly needed except for pop- 
ulation growth. Thus, a substantial portion of new farm capital result- 
ing from research and technology is substituted for labor. Capital for- 
mation in agriculture will be allied closely with the withdrawal of a 
plentiful labor supply to other uses. 

A final consideration important to the capital formation process in 
agriculture relates to two characteristics of an enterprise system. 
Whatever levels of capital accumulation are achieved by the previously 
explored process tend to be perpetuated by the inheritance process. No 
generation begins at the same point; in fact, inheritance looms large as 
the dominant source of farm capital. Such perpetuation of capital levels 
also affects further capital formation. An enterprise system tends to 
return value for productivity not only to the human factor, labor and 
management, but also to capital goods. Hence, a farmer's total income 
is enhanced somewhat in proportion to the extent of his inherited capital, 
thereby further bolstering savings out of which new capital can be 
formed. Divergent capital holdings among farmers may well become 
fixed, if not further magnified, over time. 



SOURCES OF CAPITAL AND ITS FORMATION IN AGRICULTURE 

Capital formation in agriculture can be examined in two ways, each 
with merit, namely: (1) the aggregate capital structure of all farms; 
and (2) the capital formation process for the individual farmer. 



Aggregate Farm Capital Formation 

Probably the most complete research undertaken on this subject 
was recently completed by A. S. Tostlebe for the National Bureau of 
Economic Research. The data contained in this publication will serve 
as an empirical basis for the discussion that follows. 11 

The data in Table 2.1 indicate the magnitude of total farm capital 
used over the years. The total farm capital in 1950 — measured by 
physical assets of land, buildings, implements and machinery, livestock 
and poultry, and crop inventories — reached the impressive value of 
$107 billion. 

Effects of inflation. A substantial proportion of the increase over 



11 Alvin S. Tostlebe, Capital Formation in Agriculture: Its Formation and Financing Since 
1870, Princeton University Press, Princeton, N. J., 1957. 



26 R. G. F. SPITZE 

the years is attributable to the changing price level, most specifically 
to the highly inflationary forces since 1940. During the period of 
1910-14 to 1950, $53.7 billion of the current value of farm assets, or 
exactly one-half, were added by the inflated price level alone (Table 2.1). 

Table 2. 1. Total Value of Physical Farm Assets, United States, 
Census Years 1870-1950 (billions of dollars) a 

1870 1880 1890 1900 1910 1920 1925 1930 1935 1940 1945 1950 

Prevailing 
prices 11.9 13.4 17.5 21.8 43.3 83.8 60.7 60.5 40.4 43.9 75.0 107.4 

Constant 
prices 
(1910-1914) 19.8 27.8 33.7 40.3 45.4 49.8 48.0 49.2 47.2 48.6 51.4 53.7 

Source: A. S. Tostlebe, Capital Formation in Agriculture: Its Formation and Financ- 
ing Since 1870, Princeton University Press, Princeton, N. J., 1957, pp. 54, 66. 
a Physical assets include land, buildings, implements and machinery, livestock and 
poultry, crop inventories. 

In aggregate terms, it could be concluded that inflation is a means 
by which agriculture can acquire its capital base since the price index 
of farm land — as one important indicator of farm asset value — increased 
more over the above 40-year period than the general price level. 12 
However, this gain can be somewhat illusory for the individual farmer, 
since the gains of one generation via inflation must be paid for by the 
next generation in higher initial cost. Perhaps some of the gain is re- 
tained by farmers in the inheritance process. Furthermore, farmers 
could gain through inflation if all their debts were incurred in periods 
of depressed prices and paid off in subsequent booms. Unfortunately, 
this does not seem to be the case. Substantial borrowing by farmers 
during the 1900 to 1920 period had to be repaid during the depressions 
of the 1920's and 1930's, or was liquidated through foreclosure resulting 
in capital loss to the individual. 13 An appreciable amount of the bor- 
rowing during the late 1930 to early 1940 period worked to the advantage 
of farmers as a result of inflation after World War II . 

Land grants a source. What was the source of the real capital 
(1910-14 prices) base of $53.7 billion held by farmers in 1950? One 
important source of this farm capital was the acquisition of large por- 
tions of the public domain via homesteading, "squatters' rights," special 
grants, and purchase directly or indirectly from grantors at low prices. 

Approximately 13 percent of the total land area of the United States, 
or 21 percent of the land in farms (in 1954), was homesteaded subsequent 
to 1870. 14 Hence, the total farm physical assets in 1900 (valued at $40.3 



12 Historical Statistics of the U. S., 1789-1945, GPO, Washington, D. C, 1949, p. 231; 
Economic Report of the President Transmitted to the Congress, January 1960, GPO, 
Washington, D. C, I960, p. 196; The Farm Real Estate Market, USDA, Oct., 1959, p. 28. 

13 Tostlebe, op. cit., pp. 136-39. 

14 B. H. Hibbard, A History of the Public Land Policies, The Macmillan Co., New York, 
pp. 396-402; Agricultural Statistics, 1956, USDA, Washington, D. C, 1957, p. 426. 



DETERMINANTS OF CAPITAL FORMATION 27 

billion, 1910-14 prices) were largely the result of the productive effort 
of the entire economy in acquiring the public domain, and of the effort 
of the pioneering generations in wresting the resources from their 
native state and former users. 

Savings from gross income. This still leaves unexplained the $13.4 
billion increase in real farm capital from 1900 to 1950. Aggregate data 
indicate that the major portion of this farm capital was derived directly 
from savings out of prevailing net farm income. The role of farmer 
personal savings as a source of capital becomes even more convincing 
when gross capital formation over the entire 1870-1950 period is ex- 
amined. Not only was there a $33.9 billion increase in real farm capital 
during these 80 years (1910-14 prices), but at least an estimated addi- 
tional $57.7 billion of capital went into depreciation for farm buildings 
and machinery. Of this combined gross capital formation, an estimated 
seven-eighths came from the farmers' own gross savings, while one- 
eighth came from credit. 

Limitations in the aggregate data analyzed here could result in an 
underestimation of the importance of certain phases of the farm capital 
formation process. These data represent net changes in the capital 
goods category between census periods. Capital uses or transfers 
completed within a year, or even between census periods, may not be 
evident in the data; certainly these are substantial. Furthermore, credit 
may be used and repaid within the census period without being included 
in the compilations of credit use. 

It is of increasing importance that farmers are using more supplies 
and services — largely of nonfarm origin — within a production period or 
portion thereof, e.g., fuel, insecticides, insurance, electricity, fertilizer. 
Such items are not included in the aggregate capital data as physical 
assets, yet they are capital used to further the production of farmer 
labor and management. 15 

Changing composition of farm capital. Although net capital is still 
being added in farming, the rate of growth has declined considerably. 
Only $8 billion accrued to the real value of physical farm assets (1910- 
14 prices) in the 40-year period from 1910 to 1950, while over three 
times that amount was added in the previous 40-year period. However, 
changes in the relative importance of various types of physical assets 
have characterized this century (Table 2.2). 

The dominant shifts in the farm capital structure are the increasing 
importance of implements, machinery, and other livestock relative to 
land, buildings, and workstock. Shifts in composition of farm capital 
vary by region, as is indicated for the Appalachian and Corn Belt regions 
in Table 2.2. The relative shift toward implements and machinery is 



15 Tostlebe refers to these as "intermediate products" rather than capital, ibid., Chap. 7. 
However, Leftwick suggests, "Specific examples [of capital] are buildings, machinery, land, 
available mineral resources, raw materials, semi-finished material, business inventories, 
and any other nonhuman tangible items used in the productive process." R. H. Leftwick, 
The Price System and Resource Allocation, Rinehart & Company, Inc., New York, 1955, 
pp. 4-5. 



28 R. G. F. SPITZE 



Table 2.2. Percentage That Various Types of Farm Capital Are of Total Physical Assets, 
by Current Prices, 1870-1950, United States and Selected Regions 



Physical Assets 


1870 


1880 


1890 


1900 


1910 


1920 


•1925 


1930 


1935 


1940 


1945 


1950 














(Percent) 












United States: 


























Land and buildings 


78.1 


76.3 


76.0 


76.3 


80.4 


79.1 


81.5 


79.1 


81.4 


76.6 


72.8 


70.1 


Implements and mach. 


2.8 


3.0 


2.8 


3.5 


2.9 


4.3 


4.4 


5.5 


5.3 


7.0 


8.3 


12.0 


Livestock and poultry 


13.8 


13.5 


15.3 


13.8 


11.3 


10.1 


8.3 


10.7 


8.6 


11.7 


11.9 


12.0 


Horses and mules 


5.3 


5.3 


7.3 


4.3 


6.1 


3.3 


2.6 


2.3 


3.5 


2.9 


1.3 


.5 


Other 


, 8.5 


8.2 


8.0 


9.5 


5.2 


6.8 


5.7 


8.4 


5.1 


8.8 


10.6 


11.5 


Crop inventories 


5.3 


7.2 


5.9 


6.4 


5.4 


6.5 


5.8 


4.7 


4.7 


4.7 


7.0 


5.9 


Appalachian^ 


























Land and buildings 


76.7 


77.4 


76.7 


76.9 


77.1 


76.2 


80.7 


79.4 


79.8 


78.8 


73.3 


72.0 


Implements and mach. 


2.3 


2.6 


2.5 


3.3 


2.9 


3.8 


3.9 


4.2 


3.9 


4.9 


7.0 


11.6 


Livestock and poultry 


14.5 


12.4 


14.0 


12.1 


12.6 


10.7 


7.6 


9.8 


9.5 


10.7 


10.3 


10.0 


Horses and mules 


6.9 


5.9 


7.6 


5.3 


7.9 


4.8 


3.4 


3.3 


5.0 


4.8 


3.2 


1.3 


Other 


7.6 


6.5 


6.4 


6.8 


4.7 


5.9 


4.2 


6.5 


4.5 


5.9 


7.1 


8.7 


Crop inventories 


6.5 


7.6 


6.8 


7.7 


7.4 


9.3 


7.8 


6.6 


6.8 


5.6 


9.4 


6.4 


Corn Belt: b 


























Land and buildings 


79.7 


77.5 


77.4 


79.3 


83.4 


82.8 


83.5 


80.1 


80.9 


76.8 


72.1 


89.2 


Implements and mach. 


2.7 


2.8 


2.5 


2.6 


2.2 


3.6 


3.5 


4.6 


4.7 


6.3 


7.8 


11.1 


Livestock and poultry 


12.5 


12.3 


14.4 


11.8 


10.1 


7.8 


7.3 


10.1 


8.2 


10.3 


11.5 


11.4 


Horses and mules 


5.0 


4.9 


7.2 


3.6 


5.5 


2.2 


1.9 


2.1 


3.2 


2.1 


.7 


.2 


Other 


7.5 


7.4 


7.2 


8.2 


4.6 


5.6 


5.4 


8.0 


5.0 


8.2 


10.8 


11.2 


Crop inventories 


5.1 


7.4 


5.7 


6.3 


4.3 


5.8 


5.7 


5.2 


6.2 


6.6 


8.6 


8.3 



Source: Tostlebe, op. cit., pp. 54-55. 

Appalachian region includes: Tennessee, Kentucky, North Carolina, Virginia, West Virginia, Mary- 
land, Delaware. 
Corn Belt Region includes: Iowa, Missouri, Illinois, Indiana, Ohio. 

slightly greater in the Appalachian region than in the Corn Belt region, 
even though there is greater underemployment of labor in the southern 
area. Could the desire for machinery as "consumption" goods (pres- 
tige), and could the vulnerability of the less educated Appalachian far- 
mer to sales promotion be channeling available capital into implements 
and machinery faster than its net productivity warrants? The shifts in 
livestock capital are also of interest. In spite of the trend in the Ap- 
palachian region toward more livestock enterprises, the data strongly 
suggest that such a change has not been as rapid as that taking place in 
other regions. 

Other changes associated with capital growth. Dramatic changes in 
agriculture have taken place in farm labor and farm product output 
simultaneously with the building of the farm capital structure. During 
the 1870 to 1910 period while the growth rate of physical farm assets 
was high, units of farm labor and farm output also increased rapidly. 
Subsequently, different forces seemed to take hold. Major physical 
capital growth was in machinery and implements which were substituted 
for both workstock and farm labor. As a result, capital per farm worker 
increased rapidly, farm labor declined steadily, and output increased 
with population growth and technological innovations. 

During the period of 1910 to 1950, giant strides were made in farm 
output per farm worker and per unit of capital. The century of tech- 
nology and knowledge was truly launched. Phenomenal results would be 
achieved from the use of new capital supplies almost equally suited to 



DETERMINANTS OF CAPITAL FORMATION 29 

substitute for land, livestock, or labor. 16 Yet steady increases in farm 
output are hardly due to mere physical capital, for the increments added 
have been small. Output has become the offspring of an endless expan- 
sion of knowledge — an invaluable capital addition to agriculture in the 
form of better- informed management and labor, improved technology of 
production, and costly but profitable urban-produced supplies for every 
phase of the production process. 

Considerable support could be mustered for the conclusion that in 
aggregate terms agriculture has all the capital goods it will need in the 
foreseeable future. The capital additions that will be needed in real 
estate improvement, machinery, and urban-produced supplies will not 
change the totals very much. A highly inelastic product and dynamic 
technology set the perimeters. As long as low earnings exist for many 
factors already in farm production, the theory of capital formation does 
not suggest that vast streams of the economy's savings will rush to the 
agricultural sector to seek the reward of high marginal returns. 17 



Sources of Capital for the Individual Farmer 

Capital only partial answer . How can the seeming contradiction be 
reconciled, i.e., adequate capital goods in the aggregate, need for much 
more capital by the individual farmer, and low returns on farm capital? 
The answer to improved farm income does not lie with a greater use of 
capital in existing patterns. Rather, it depends (to the extent that it is 
a capital problem) upon a capital base being used by management capable 
of higher productivities and in large enough combinations to return a 
desirable income in the presence of low average returns. An integral 
need is a reduction in the number of and an increase in the capacity of 
farm workers. Considerations other than capital, such as power in the 
market place, healthy economy, agricultural public policy, etc., are 
crucial to farm income improvement. 

Contrasts at the aggregate and farm levels. The aggregate structure 
of farm capital may appear quite stable, while the ownership and use of 
such capital is constantly changing hands. It is at the individual farmer 
level where disparity of management and capital formation exists and is 
often perpetuated over the generations. This is where institutional bar- 
riers of belief, culture, knowledge, agency policy, and farm operation 
can hamper adequate capital growth. Furthermore, a farmer may find 
it profitable to use additional capital to expand production in a particular 
enterprise, e.g. strawberries, while similar action by a large group 
could result in loss of capital to all. Or a farmer may find local credit 
sources able and willing to finance a livestock enterprise, while similar 
action by many farmers could quickly exhaust the local capital supply. 



16 V. W. Ruttan, "Agricultural and nonagricultural growth in output per unit of input," 
Jour. Farm Econ., Vol. 39, Dec, 1955, pp. 1573-76. 

17 Farmer-owned capital had an estimated rate of return of only 3.2 percent in 1959, 
lowest in 25 years. The Farm Real Estate Market, USDA, Washington, D. C, Feb., 1960, 
p. 23. 



30 R. G. F. SPITZE 

These contrasts at the individual and aggregate levels reflect major 
obstacles unique to the farmer. Not only are the laborer, manager, and 
capital owner different decision-makers in the urban corporate organi- 
zation, but the identity of ownership of particular capital goods remains 
obscure — so obscure that ownership can be transferred and inherited 
without having any effect upon the use of the capital. Also, as an ex- 
ception to the process of capital formation, the corporation secures 
much of its capital by withholding income for reinvestment before it 
becomes available for possible consumption as earnings to individuals. 
Conversely, the farmer is usually the embodiment of all three — labor, 
management, and capital — without preparation for the decisions de- 
manded or opportunity to reconcile conflicts among the roles. The 
primary qualification of most farm youths for farming is experience as 
laborers on family or neighboring farms. Their fitness for management 
is given little consideration, and their readiness for the role of capital- 
ist is ignored. 18 In the best of traditions, the burden of financial deci- 
sions have been reserved for the head of the household, who may expect 
little help from public education. 

Although there are shortcomings, the decisions of individual farmers 
in an enterprise economy result in capital formation in agriculture. 
Farm capital is not formed in the aggregate. Individually, many farm- 
ers will need substantially increased amounts of all types of capital to 
close the income gap (cf. Chapters 1 and 14). The dominant capital 
problem is how the individual farm operator can secure these increasing 
amounts of capital, large already, on the average, as is evident in Table 
2.3. Part III is primarily concerned with this problem. The problem 
may involve mainly a redistribution of a stable aggregate farm capital 
base among operators and owners quite different from those now con- 
trolling it. 

Sources of capital . Capital formation at the farm level can be best 
understood by a brief examination of the primary sources of capital. 
These are: (1) inheritance, marriage, and gifts, (2) purchase of capital 
with personal savings, (3) borrowing capital goods (renting), and (4) 
borrowing purchasing power for capital goods (credit). 

1. Inheritance, marriage, and gifts do not even register as any one 
of the sources of capital at the aggregate level, but at the individual 
farmer level these are probably the most important means of capital 
acquisition, as indicated in Chapter 9. 19 Inheritance is a vehicle de- 
signed only to transfer ownership from one generation to the next. 
Since it is not designed for any particular objective of capital use, its 
utility in meeting farmers' capital needs depends upon how it is used. 
Thus, the degree to which the following conditions are met can determine 



18 L. A. Jones, "Financial management for farm people," Agricultural Finance Review , 
USDA, Washington, D. C, Vol. 18, Nov., 1955, pp. 1-9; What Young Farm Families Should 
Know About Credit, USDA, Farmers' Bui. No. 2135, Washington, D. C, June, 1959. 

19 Can You Own Your Farm?, NCR Publ. No. 14, Ky. Agr. Exp. Sta. Circ. 65, Nov., 1949; 
Becoming a Farm Owner, Publ. No. 17 of the Southeast Land Tenure Committee, Va. Agr. 
Exp. Sta. Bui. 473, June, 1955. 



DETERMINANTS OF CAPITAL FORMATION 



31 



Table 2.3. Capital, Financial, and Income Data Per Farm and 
Per Farm Worker, United States, 1958 



Per Farm 



Per Farm Worker 



(Dollars) 



Capital 

Physical assets 
Real estate (land and buildings) 
Nonreal estate 

Livestock and poultry 
Machinery and motor vehicles 
Crops stored on and off farms 

Production goods and services a 

Financial assets 

Deposits and currency 
U. S. savings bonds 
Investments in cooperatives 

Household furnishings and equipment 

Liabilities 

Real estate debt 
Nonreal estate and others 

Proprietors' equities 

Gross farm income 

Net income of farm population from farming 



24,500 



15,500 



3,000 
3,700 
1,600 


1,900 
2,300 
1,000 


3,800 


2,400 


2,000 

1,100 

800 


1,300 
700 
500 


2,700 


1,700 


2,200 
2,000 


1,400 
1,300 


15,000 


22,100 


8,300 


5,300 


3,400 


2,100 



Source: Balance Sheet of Agriculture, 1959, USDA, Agr. Info. BuL No. 214, Washing- 
ton, D. C, Oct., 1959, p. 6; Farm Income Situation, USDA, Washington, D. C, 
July, 1959, pp. 40, 41, 47, 48, 54. 

a Primarily of nonfarm origin. 

how well the inheritance process will contribute to capital formation 
for the individual farmers: 20 

a. Inheritance received when heir is ready to commence farming, 
not at middle age while in midst of alternative career. 

b. Inheritance transferred in usable form, such as a farm or full 
line of machinery rather than an isolated tract of land or three- 
bottom plow. 

c. Inheritance available as a "going concern" with highest possible 
value as capital. That is, an operating dairy is more valuable 
than the sum of individual components, or land in use is more 
valuable than abandoned land. 

d. Inheritance involving the securing of expectations for both heir 
and predecessor so decisions of both can be more rational. 

e. Inheritance arranged so predecessor's actions are viewed as 
fair and helpful, and yet provides for his old age without burden- 
ing others. 



"Relevant research results on this problem are found in K. H. Parsons and E. D. Waples, 
Keeping the Farm in the Family, Wis. Agr. Exp. Sta. Bui. 157, Sept., 1945. 



32 R. G. F. SPITZE 

Incorporation of estates should be explored as one way of meeting 
these conditions. For those farmers fortunate enough to inherit capital 
under these desirable conditions, no better spurce can be found. How- 
ever, for many farmers, one or all of the other three sources must be 
used. The choice should be related to his income level, the amount of 
his accumulated capital, his managerial ability, and his physical well- 
being and interest. 

2. Savings were found at the aggregate level to be the most impor- 
tant current source in real gross farm capital formation. Savings are 
also a vital source for the individual farmer with enough income to 
support capital formation. The process of primary interest here is 
that of savings prior to purchase of the capital goods, rather than sub- 
sequent to the purchase as in credit use. 

Savings become farm capital through three important processes. 
First, a substantial portion of gross capital formation in agriculture 
takes the form of buildings and machinery depreciation, production sup- 
plies, livestock replacement, and increases in values of livestock and 
given real estate. These capital inroads into gross income are so vital 
and normal to the ongoing farm operation that they usually take prece- 
dence over consumption. Second, the burden on every farmer to secure 
his own capital often calls for the use of production credit. This neces- 
sitates a type of forced saving to protect his livelihood, in which debt 
repayment may well get priority over consumption. Third, the entire 
purchase price of a capital good may be saved before the acquisition 
is made. 

On the other hand, caution should be exercised in placing a heavy 
burden upon savings as the source of capital for the individual farmer. 
A low net income leaves little margin, after depreciation and consump- 
tion needs are met, for the volume of savings needed. The gross capital 
formation and increase in financial reserves at prevailing prices ex- 
hibited by agriculture from 1900 to 1950 — originating largely with sav- 
ings — averaged only an estimated $300 per farm per year. 21 At even 
twice that rate of saving, though half the investment were inherited, 27 
years would be required for a farmer to accumulate just the average 
amount of physical assets used per farm in 1958 (Table 2.3). 

Just as profitable farming demands more capital, so the farm family 
is increasingly expecting a higher level of consumption (living) as the 
level of living of the nation rises. These same needs and desires con- 
tinue to raise the cost of rearing farm children. It is indeed question- 
able whether the agricultural ladder process, firmly anchored in savings 
as the source of farm capital, is a meaningful alternative for future 
agriculture. 22 The role of savings can best provide for a gradual expan- 
sion of capital once an income earning base of farm capital has been 
obtained elsewhere. 



"Capital formation, financial reserves, and number of farms from Tostlebe, op. cit., 
pp. 50, 138. The rate of savings during the favorable 1945 to 1950 period was an estimated 
$800 per farm per year. 

22 Kanel, D., et al., "Getting started in farming is hard," Land, The 1958 Yearbook of 
Agriculture, USDA, Washington, D. C, pp. 254-62. 



DETERMINANTS OF CAPITAL FORMATION 33 

Borrowing capital goods (renting). The third source of capital for 
the individual farmer, one not exposed by aggregate data, is borrowing 
the capital goods directly, or renting. Renting can take various forms — 
whole-farm share and cash arrangements, leasing of land units adjacent 
to owned land, custom use of capital goods, and certain contracts with 
vertical integration, as in livestock and poultry. 23 

Trend data on tenancy may conceal more than it reveals. To be 
sure, the trend generally has exhibited a reduced percentage of rented 
farms partly due to less share-cropping and to recovery from the ag- 
ricultural depressions of the 1920's and 1930's. Upon closer scrutiny, 
however, renting is found as a stable or increasing system of farming 
in the commercial Corn Belt. Furthermore, in 1954, 34 percent of the 
farm land in the United States was operated as rented capital, most of 
it being leased by nearby owners. 24 Renting is probably second only to 
inheritance in importance as a source of capital to the individual farmer 
(cf. discussions by Raup in Chapter 9). In many lands the social, polit- 
ical, and economic revolutions call for the abolition of renting as an 
institution, e.g. Japan and India; yet renting has become a firmly estab- 
lished means of providing farm capital in some of the more stable, 
developed countries, e.g. England. 25 

Renting is a satisfactory source of capital only for certain farmers 
under particular conditions. If adequate capital can be acquired through 
inheritance, savings, or credit, assuming the role of a renter has little 
merit. However, farmers who are unable to obtain adequate capital 
through these means, but who have potentially sound managerial ability, 
may find renting an attractive source of capital. The adequacy of rent- 
ing will further depend upon whether the operator is able to secure 
dependable, legally sound, and enduring rental arrangements, and 
whether he is willing to assume the somewhat unstable and socially less 
acceptable tenure status. 26 Upon meeting these conditions, farmers 
have a good chance of acquiring more capital and achieving higher net 
returns by renting than they would via credit. A further difference, 
without definite merit, is the expectation that the renter will share with 
the capital owner both windfall gains and losses. In the absence of per- 
petual indebtedness for the major physical farm assets, renting may 
assume an increasingly important role as a source of capital for the 
individual farmer. The argument for perpetual indebtedness is advanced 
in Chapters 1, 13, 15, and 17. 

Borrowing purchasing power for capital (credit) . The final major 
source of capital for the individual farmer is the borrowing of purchasing 



23 A. B. Mackie and E. L. Baum, "Programs for commercial farmers with low incomes," 
Problems and Policies of American Agriculture, Iowa State University Press, Ames, Iowa, 
1959, pp. 417-22; R. C. Engberg, "Credit implications of integration in agriculture," Jour. 
Farm Econ., Vol. 40, Dec, 1959, pp. 1370-79. 

24 Land, op. cit., p. 563; Agricultural Statistics, 1956, USDA, Washington, D. C, p. 426. 

25 K. H. Parsons, R. J. Penn, P. M. Raup, eds., Land Tenure, University of Wisconsin 
Press, Madison, Wis., 1956. 

M R. G. F. Spitze and Gregorio Alfaro, "Property rights, tenancy laws of Cuba, and eco- 
nomic power of renters," Land Econ., Vol. 35, Aug., 1959, pp. 277-83. 



34 R. G. F. SPITZE 

power, or credit. The extent of credit use, measured by the ratio of 
total farm debt to value of physical assets, has risen and was approxi- 
mately the same in 1959 as in 1910; however, it was twice as high in 
1930. 27 Credit will assume a larger role according to the extent to 
which farmers seriously attempt to obtain capital needed to raise their 
incomes, and as the three other major sources of capital prove 
insufficient. 

Credit has unique functions to perform in the farm capital formation 
process. Gross income can probably provide the capital for deprecia- 
tion and much of the gradual accretion needed in physical farm assets, 
with the possible exception of machinery and buildings. Yet other func- 
tions remain for credit if the individual farmer is to have adequate cap- 
ital. Ownership of existing farm capital, particularly the land resources, 
must be recombined under fewer operators. Furthermore, as long as 
owner- ope ratorship is the desired form of tenure, all farm capital must 
be transferred to new operators each generation. 28 As incorporation is 
used more by farmers as a versatile financial arrangement to assist in 
acquiring capital, bearing risk, and facilitating inheritance, credit be- 
comes a more useful vehicle. Savings of both farm and nonfarm origin 
can be tapped through credit. Finally, credit is well suited to assist the 
farmer in obtaining the nonfarm capital goods increasingly needed as 
supplies for profitable production. 

Credit, however, is not a satisfactory nor possible source of capital 
for all farmers. Even more than in renting, managerial ability is a 
prerequisite for satisfactory use of credit. Whereas in some rental 
arrangements managerial assistance is provided by the owner or sup- 
plier of the contract, the lender generally does not offer similar help. 
Furthermore, a borrower must have considerable owned capital if he is 
to obtain credit for an adequate unit. When a farmer with little equity 
attempts to use credit to meet all his capital needs, he may be burdened 
with a low-producing farm, high interest rates, and unfavorable terms. 
Finally, adequate credit use is rooted in adequate knowledge and beliefs. 29 

Credit sources are varied as to organization and operation, both of 
which are subjects of subsequent discussions. Generally, farmers have 
access to noncooperative private, cooperative private, and public sources 
of credit. Furthermore, most of these sources are being improved by 
new policies and programs. Two of these are: (1) revised procedures 
of the cooperative farm credit agencies to meet some of the many farmer 
needs, e.g., the initiation by the Production Credit Association of the 



"Estimated at 13 percent for January 1, 1960, with one-half the debt being real estate 
and one-half being nonreal estate. 1960 Agricultural Finance Outlook, USDA, Washington, 
D. C, Nov., 1959, p. 5. 

28 Joseph Ackerman and Marshall Harris, Family Farm Policy, University of Chicago 
Press, Chicago, 111., 1947, pp. 15-28. 

29 W. E. Hendrix, Approaches to Income Improvement in Agriculture, Prod. Res. Rpt. No. 
33, ARS, USDA, Washington, D. C, Aug., 1959; W. H. Nicholls, "Southern tradition and 
regional economic progress," Southern Econ. Jour., Vol. 26, Jan., 1960, pp. 187-98. 



DETERMINANTS OF CAPITAL FORMATION 



35 



five-year intermediate-term loan; and (2) expanded use of the agricul- 
tural representative by commercial banks serving rural areas, result- 
ing in apparent benefits to both farmer and banker. 30 This needed change 
is discussed by Duggan in Part I, and others in Part in. The latter 
program can help overcome disadvantages to farmers associated with 
the urban nature of financial institutions. In view of rapidly increasing 
capital needs per farm worker and the longer terms of many of the cap- 
ital commitments, incorporation, continuous renting, and perpetual in- 
debtedness deserve further consideration for facilitating the capitaliza- 
tion process. 

Savings, renting, and credit have been explored as sources of capital 
for farmers not fortunate enough to inherit a sufficient amount (see 
Figure 2.1 for summary). Yet none of these sources are relevant for a 
vast group of low-income farmers, namely, the aged, disabled, disin- 
terested, and those possessing little potential managerial ability. The 
odds are convincing that these farmers cannot secure and use capital 
adequately to net them a desired income. However, this hardly implies 
the absence of a problem. The solutions would seem to rest not with 
obtaining farm capital, but with subsistence grants, improved educational 
opportunities, or migration assistance as discussed in Part IV. 



30 R G. F. Spitze and R. J. Bevins, The Agricultural Representative Program in Com- 
mercial Banks of Tennessee, Tenn., Agr. Exp. Sta. Bui. 289, Aug., 1958. 



Farm Capital Goods Base 



7 



of Currently Used Capital 
as Physical Assets (8155 Billion) 
Production Supplies (118 Billion)* 





Public Grants 

a 

Settlement 




Major portion of 840 billion 

of physical assets in 1900 

(1910-14 prices) 




Renting 




34 % of farm 

land 

in 1954 


1 




1 














Savings for Net Capitol 

a 

Depreciation 




At least 8 62 billion 
from 1900-1950 








Credit 




13% of total 
physical farm 
assets in 1958 


1 




1 




Credit 




At least 89 billion 
from 1900-1950 
















1 




1 






Inflation 




8 54 billion 
from 1910-14 to 1950 




Inheritance 

a 

Savings 




Inheritance accounts 

for most 

of remainder 



♦Taken from data for 1958 used in Table 2.3. Depreciation involved during the 
years of development does not, of course, show up in these cumulative data. 

Fig. 2.1. General summary of capital formation process in agriculture (esti- 
mated from data in previous discussion). 



36 R. G. F. SPITZE 



Discussion 



C. E. BISHOP* 

Spitze's definition of capital revolves around the concept of absti- 
nence. This requires him to be concerned with differences between 
"maintenance" and "consumption." Spitze concluded, after some dis- 
cussion of the concept of capital, that capital is produced goods and 
services saved from consumption and used by or as a part of the human 
agent in further production. In view of his rejection of the tripartite 
classification of factors of production, could he not define capital as a 
valuable input that has duration? This view of capital allows the inclu- 
sion of public and semi-public sources as well as private sources. 
Furthermore, it makes no distinction between land and other "factors 
of production." Rather, the distinction is based upon durability and 
nondurability of assets. 

In his discussion of the savings process and capital formation, Spitze 
emphasizes the fact that farmers have held values with regard to the 
allocation of income to savings and consumption different from those 
that have characterized much of the rest of society. This difference, 
however, is being reduced over time, and farmers now spend their in- 
come in approximately the same manner as other groups in our society. 

Spitze emphasizes the role of knowledge as a factor influencing both 
supply and demand forces. He does not give due consideration, however, 
to the role of knowledge and the development of new technology as a 
form of public investment in agriculture. However, he does call atten- 
tion to the giant strides in farm output per farm worker and per unit of 
capital that took place between 1910 and 1950, and the extremely large 
increase in output (24 percent) that occurred between 1950 and 1958 
while total inputs were constant. The fact that total inputs were constant 
emphasizes our inability to place a value on management as such. Man- 
agerial capital is not considered as a part of the capital input in agri- 
culture. 

A more explicit treatment of resource development as a factor in 
capital formation would have been helpful. Only in this way can we tie 
the static aspects of resource use into concepts of capital formation. 

Spitze calls our attention to the importance of working out new ways 
of "redistributing a relatively stable aggregate farm capital base among 
operators and owners quite different as individuals from those now con- 
trolling the capital base." He properly attacks our system which re- 
quires each generation of farmers to start from the beginning and ac- 
cumulate the capital necessary to operate a profitable business. He 
contrasts the urban and farm situations in this regard. The question at 



♦Head, Department of Agricultural Economics, North Carolina State College. 



DISCUSSION 37 

hand, however, pertains not to urban and rural locations, but to the 
structural organization of agriculture in comparison with the structural 
organization of nonfarm firms. The difference is primarily one of the 
importance of individual proprietorship as a form of business. 

Spitze raises the question of whether farm families should continue 
to have to rely upon savings as a source of capital for agricultural ad- 
justment as they adopt more of the consumption patterns of urban people. 
This really raises the question of whether owner- ope rated farms can 
be organized in such a way as to generate sufficient income to provide 
equal levels of living for farm and nonfarm people and at the same time 
permit the farmer to pay off principal on his debts. This is one of the 
most difficult problems facing American agriculture. 

In Chapter 2 Spitze indicated that renting and credit are satisfactory 
sources of capital only for certain farmers under particular conditions. 
The conditions developed by him, however, are not sufficient to serve 
as guides in resource-use decisions. This problem area certainly war- 
rants a great deal more time and thought by economists. 



GLENN E. HEITZ* 

Spitze suggests that the capital problems of agriculture may well be 
rooted more in inadequate demand than inadequate supply. He attributes 
inadequate demand to lack of understanding by farmers in this matter 
of financial management. In a 1952 study, the Farm Credit Administra- 
tion found that management, not credit restriction, was the greatest 
limiting factor in progressive use of credit for farm improvements. 

What can be done to help improve the inadequate demand, or lack of 
understanding, in financial management? Agricultural lenders them- 
selves should, in many cases, assume more of this responsibility. The 
agricultural colleges should devote more time and effort to this subject 
in their teaching, extension, and research departments. Our colleges 
have done much to help farmers grow many blades of grass where only 
one grew previously, but have done far too little in this matter of farm 
financial management. Some money and manpower in our colleges de- 
voted to this job should pay big dividends in service to farmers. Also, 
there should be closer coordination of agricultural lenders, colleges, 
and agricultural leaders in this over-all educational program. 

Certainly the farmer's views on credit should receive adequate con- 
sideration. A few years ago I asked a group of predominantly commer- 
cial farmers what they considered deserving farmers have a right to 
expect of credit. They agreed that "deserving" means the ability to 
borrow and repay with interest and be in a better financial position after 
having done so. Those farmers listed the following characteristics that 
deserving farmers can rightly expect of credit: 

1. An understanding, permanent, and dependable source of credit. 



♦Director, Cooperative Bank Service, Farm Credit Administration. 



38 R. G. F. SPITZE 

2. A credit plan that fits the farm plan in terms of (a) providing 
the right amount of money at the right time, with a minimum of 
time, trouble, and expense; (b) providing for repayments when 
products are marketed; and (c) interest charged on the actual 
number of dollars used and for the exact number of days the 
money is used (cf. Chapters 11, 13, 15, and 16). 

3. Credit that will permit farming according to sound farm man- 
agement practices rather than according to the limited cash 
on hand. 

Progressive and farsighted agricultural lenders, such as the banks 
and associations that comprise the Farm Credit System, know that 
farmers have such credit needs and are constantly reshaping their 
programs to meet these needs (cf. Tooteirs discussion in Chapter 17). 



Chapter 3 



GEORGE K. BRINEGAR* 

University of Connecticut 



Structure of the Capital 
Market and an Evaluation 
of Its Components 



THE EFFECTIVENESS of capital markets in serving agriculture 
will be evaluated in this chapter. This evaluation is made by di- 
recting attention to all of the capital used in or by agriculture, 
regardless of the specific form in which the capital happens to be mo- 
mentarily. Thus, capital in the form of people and technology is just 
as important, for the purpose at hand, as capital in the form of land, 
buildings, and other items. This broad view of resource allocation as 
a capital problem is needed if, for example, gaps in the markets for 
capital are to be analyzed — a matter of more significance than deter- 
mining how well the individual capital markets do what they are de- 
signed to do. The allocation of capital among alternative uses is the 
focal point of interest in evaluating the capital markets.! 

The thesis of the author is that existing capital markets have not 
been, and are not effective in providing an adequate amount or an effi- 
cient use of capital in agriculture. This statement implies that we face 
the challenge of being creative, i.e., creative enough, and imaginative 
enough, to develop means, consistent with the goals of a free and pro- 
gressive society, that will bring forth a reasonably adequate demand 
for, supply of, and allocation of capital to agriculture and the rest of 
the economy. This challenge falls into three interdependent parts. 
These parts concern the supply of capital in the aggregate; the effi- 
ciency of existing suppliers of capital; and the closing of gaps in exist- 
ing capital markets. 



DIMENSIONS OF CAPITAL NEEDS OF AGRICULTURE 

The dimensions of the capital needs of agriculture are explored by 
asking: When and how much capital is employed in agriculture? The 



♦Subsequently, Professor of Agricultural Economics, University of Illinois. 

|It is hoped that the context in which the word capital and related terms are used will 
convey the meaning intended. It has been an interesting experiment to write this chapter on 
the assumption that an evaluation of the capital markets can best be made by treating credit 
problems as inseparable from capital problems, and by treating capital problems as a matter 
of the allocation of all resources. Thus, the appropriate yardstick to be used in evaluating 
the capital markets serving agriculture is the efficiency of the allocation of capital in 
agriculture. 

39 



40 GEORGE K. BRINE GAR 

first place to look for part of the answer to this question is in the Bal- 
ance Sheet of Agriculture. 1 This source indicates that the total assets 
of agriculture on January 1, 1959, amounted to $203.1 billion, divided 
as follows: 

Billions 



Real estate 


$125.1 


Livestock 


18.1 


Machinery and motor vehicles 


18.4 


Crops 


9.4 


Household furnishings and equipment 


13.1 


Deposits and currency 


10.0 


U. S. savings bonds 


5.2 


Investments in cooperatives 


3.8 


Total 


$203.1 



What other capital is used in agriculture that is not accounted for 
in the Balance Sheet of Agriculture? An outside observer would find, 
upon careful examination, that many of the people working on farms 
are not listed on the Balance Sheet of Agriculture. However, after his 
initial surprise, this observer would find that these people, at least 
some of them, are entered on another sheet of paper called the Income 
Statement for Agriculture. On this statement he finds two entries, one 
with reference to farm operators, and the second labeled "wages to 
hired labor. >} After considerable effort to determine what, if anything, 
these people are worth, he comes to the conclusion that they must be 
worth more than the items listed in the Balance Sheet of Agriculture. 

A close examination indicates that many roads, school buildings, 
dams, electrical facilities, etc., were not included in the Balance Sheet 
of Agriculture. Further examination reveals that a great deal of activ- 
ity seems to be centered on bringing farmers various things that they 
use to produce food and fiber. In addition, there are other people who 
market the food and fiber produced by farmers. Little of the capital 
used in these activities is accounted for on the Balance Sheet of Agri- 
culture. Thus, a balance sheet for agriculture, coming anything close 
to accounting for all the capital used, would not only need to count the 
items included in the Balance Sheet of Agriculture, but also the people, 
community, and marketing facilities. Martin, Mackie, Woodworth, and 
Fanning examine the human aspects and their environment in evaluat- 
ing capital use and investment in agriculture in Chapters 4, 22, and 23. 

A last item which might bother the outside observer is how to count 
the technological knowledge employed in food and fiber production 
since it has no value explicitly imputed to it. After careful considera- 
tion this, too, would be counted because people were willing to spend 
money to get new technology, and thus, it must be worth something, 



balance Sheet of Agriculture, Agr. Info. Bui. 214, USDA, ARS, 1959. 



STRUCTURE OF THE CAPITAL MARKET 41 

even though it raises a question of double counting on the distribution 
side. 2 The dimensions of capital used in agriculture are so defined. 



SOURCES AND DETERMINANTS OF THE SUPPLY OF 
CAPITAL USED IN AGRICULTURE 

The capital employed in agriculture is examined with reference to 
sources, and the determinants of supply. 



Sources of Capital 

The sources of capital employed in agriculture will be examined in 
terms of: (1) capital accounted for in the Balance Sheet of Agriculture, 
(2) capital invested in people, and (3) all other capital embodied in items 
such as roads, technology, etc. 

Balance Sheet of Agriculture . On January 1, 1959, the liabilities of 
agriculture amounted to $23.3 billion, while proprietors' equities were 
listed at $179.8 billion for a total of $203.1 billion. The liabilities were 
composed of $11.3 billion in real estate debt, $2.5 billion Commodity 
Credit Corporation loans and guarantees, and $9.5 billion of short-term 
debt. An examination of proprietors' equity on the asset side indicates 
that $45.6 billion worth of real estate was rented, $17.3 billion from 
other farm operators, and $28.3 billion from nonfarm operators. Thus, 
the amounts of capital identified as to source were as follows: 

Billions 

Real estate debt $11.3 

Commodity Credit Corporation debt 2.5 

Other reporting institutions debt 5.8 

Non-reporting creditors 3.7 

Real estate rentals 45.6 

Total $68.9 

The rental of capital in other forms is also found in agriculture. If 
these rentals amounted to 10 percent 3 of the value of livestock, ma- 
chinery, and stored crops (excluding crops with CCC loans), an addi- 
tional $4.6 billion of capital moved to farm operators through the capi- 
tal markets. Thus a total of some $73.5 billion of capital, on January 
1, 1959, was borrowed or rented by farm operators. This amounted to 
36 percent of the total assets listed in the Balance Sheet of Agriculture. 4 



2 This capital need is normally not considered in analyses of this type because thinking 
is restricted to the confines of distribution theory. This is a mistake. Value and growth 
theory is also relevant in this context. 

3 An estimate based on a Great Plains study. Balance Sheet of Agriculture, p. 12. 

4 Some double counting is involved because landlords are not necessarily debt free. 



42 GEORGE K. BRINE GAR 

Analysis of the allocation of this borrowed capital indicates that 45.5 
percent of all real estate capital was borrowed, while 28.1 percent of 
all other capital, excluding financial assets, was borrowed. 5 

Capital invested in farm people . No attempt will be made to put an 
exact price on the heads of the agricultural population for several rea- 
sons, not the least being the problem of choice of method— cost of pro- 
duction; cost of replacement; earnings, discounted after maintenance 
and depreciation, in agriculture; possible earnings outside agriculture; 
and the like. It is clear that some 5 million farm families are involved 
and that the capital so invested in these people exceeds the amount ac- 
counted for in the Balance Sheet of Agriculture. Capital for investment 
in people comes largely from household income and government tax 
expenditures, through the provision of such services as education, 
health, and welfare. Martin presents data on these types of invest- 
ments in Chapter 4. 

Other capital invested in agriculture. Significant amounts of capital 
are used in agriculture for the development of new technology, commu- 
nity facilities, and the marketing of farmers' products and supplies. 
The capital used to support these activities comes from various 
sources. Support for the development of new technology is largely 
provided by government and the suppliers of inputs sold to farmers. 
Both private and public funds are used in financing community facili- 
ties. In these cases, most of the capital is supplied out of income, 
earnings, or taxes, though the credit and financial markets are some- 
times the immediate sources of supply. In the case of firms engaged 
in the marketing of agricultural products or supplies, the sources of 
capital are similar to those generally available to businesses in other 
parts of the economy. 



Determinants of Capital Supply 

The supply of capital available for agriculture is examined with 
reference to the total supply of capital for the entire economy and in 
relation to the share of this capital that can be directed to agricultural 
uses. 

Aggregate supply of capital . The determinants of the total amount 
of capital that a society is willing to hold, and of the increments it is 
willing to add to these holdings each year, are complex. A list of these 
determinants would include such items as income — including the total 
amount, changes, and its distribution; the structure of institutions; 
customs, the values of the people; interest rates. The major variable 
among these determinants in the short run is the interest rate or the 
price that people will be paid for the use of capital. 

Little information is available regarding the price elasticity of 



5 The 28.1 percent figure would be reduced had the $19 billion of financial assets been 
included and the $2.5 billion of CCC loans and assets been excluded. CCC loans are more 
nearly sales of commodities than regular indebtedness in the usual meaning of the term. 



STRUCTURE OF THE CAPITAL MARKET 43 

supply of savings in the aggregate. 6 Two general types of information 
which bear upon this question are available. One type concerns the re- 
lationship between income and savings, while the other centers upon 
the differences in the behavior of people where the returns for use of 
savings differ. Both types of data suggest that the short run price 
elasticity of supply for savings is very low. The logic of this conclu- 
sion is fairly simple. 

When income and its distribution and changes therein are related to 
savings and changes therein, significant relationships are observed. 
Thus, to the extent capital accumulation can be explained in terms 
other than the interest rate, the interest rate cannot be the explanatory 
variable. An examination of cross-sectional data shows that farmers 
and small businessmen save significantly higher percentages of (about 
double) their incomes than do other people of comparable ages in com- 
parable income groups. These farmers and businessmen are also the 
people who have opportunities for obtaining the highest marginal yields 
on capital. Many farm operators can obtain marginal yields on capital 
of 50 to 100 percent per year. This same situation may well exist for 
many businessmen. For example, Schweiger reports that small manu- 
facturing corporations in 1957 earned, on the average, at least 16 per- 
cent on net worth after taxes plus, probably, several percentage points 
accruing from understated earnings. He also indicated that the average 
return to capital ". . .tends to be much lower than the return possible 
on marginal capital. " 7 It can also be observed that small businessmen 
and farmers often fail to take advantage of cash discounts at an interest 
cost of usually 24 to 36 percent per year. Thus, if marginal yields on 
capital amount to between 25 and 100 percent and the percentages of 
income saved by people with these opportunities are double for these 
groups (unincorporated businessmen, 17 percent) compared with all 
urban units (12 percent) in the same income group ($7,500 to $10,000), 8 
and the yield on savings for the latter group is in the 3 to 5 percent 
range, fairly low price supply elasticities are suggested. 9 Thus the 
capital markets appear to have little, if any, effect on the total supply 
of capital in the short run. 

In the long run the situation may well be very different. The es- 
tablishment of new credit institutions and of other enterprises, such as 
life insurance companies, may significantly affect the total supply of 
capital available to a society. 



6 The concern here is with real savings, not with measures that result in encouraging 
the use of, for example, idle cash balances. This does have an impact on real saving through 
increasing prices or inducing other action to restrain prices, or through changes in the level 
of employment. 

7 Irving Schweiger, "Adequacy of small business financing: another view," Financing 
Small Business, Part I , Vol. I, Background Studies, Federal Reserve System, 1958. 

8 Figures in problem taken from Schweiger article drawn from the 1950 B. L. S. Wharton 
study. 

9 These figures are at best only suggestive in that the same person will often have a 
savings account with a 3 or 4 percent return and yet borrow money on, for example, a car 
at perhaps 36 percent. 



44 GEORGE K. BRINE GAR 

Share of capital available to agriculture . The supplies of credit 
available to agriculture from some lenders appear to be unlimited at 
going interest rates if the quality requirements of the lenders are met. 
There appears to be a general agreement on this point in Part III. 
Over time the supplies of credit also appear to be infinitely elastic, 
though interest rates, along with quality requirements, change. These 
changes appear to occur in step with the changes experienced by other 
borrowers. Thus the credit markets appear to be extremely effective 
and efficient in obtaining credit for farm operators from both local and 
national sources This view is also held by Baughman and Wetmore in 
Chapter 12 and Engberg in Chapter 16. This evaluation should not be 
interpreted to mean that existing interest rates, quality standards, etc., 
do or do not make economic sense, but that, given the policies and tra- 
ditions of lenders and the legal restraints under which they operate, 
they are highly efficient in obtaining credit for agriculture. 

The noncredit capital markets for agriculture, largely concerned 
with rental agreements, are much more difficult to evaluate than are 
the credit markets. However, these markets seem to be fairly efficient 
in the specialized areas in which they operate On the other hand, 
equity capital obviously is not available to agriculture in the forms 
that can frequently be obtained by nonagricultural firms. 



THE SUPPLIERS OF CAPITAL TO AGRICULTURE 

An evaluation of the effectiveness of the capital markets is made by 
focusing attention upon those institutions which supply capital to agri- 
culture through credit and other means. Questions concerning these 
suppliers are centered upon the magnitude of their activity, their 
sources of capital, the parts of the capital market served, lending poli- 
cies and practices, and the efficiency of their operations with respect to 
the costs of lending and the needs of borrowers. 



The Suppliers of Credit 

The relatively minor role that suppliers of credit play in supplying 
agriculture with capital is suggested by the data in Table 3.1. These 
figures, of course, tend to exaggerate the relative roles of these lend- 
ers since the Balance Sheet of Agriculture accounts for only a small 
percentage of the capital used in agriculture. 

These suppliers of credit obtain the capital they provide to agricul- 
ture from different squrces. The groups classed as individuals and 
others, and as commercial and savings banks, obtain their funds 
largely from local sources, while the Farmers Home Administration 
and the Commodity Credit Corporation obtain their funds largely from 
the Federal treasury in amounts determined by Congress. The Federal 
Land Banks and the Production Credit Associations obtain their funds 



STRUCTURE OF THE CAPITAL MARKET 
Table 3.1. Nature of Agricultural Credit Extension by Lenders 



45 





Percentage of all 


Amount of debt 




debt outstanding 


outstanding held by 




held by 


various 


various lenders as 




lenders 


percentage of assets 








used in agriculture 




Farm 


Nonreal 


and accounted for on 




mortgage 


estate 


the Balance Sheet of 


Type of lender 


debt 


debt 


Agriculture 


Federal Land Banks 


18.1 





1.0 


Farmers Home Administration 


3.2 


4.5 


.4 


Life insurance companies 


24.5 


— 


1.4 


Commercial and savings banks a 


13.5 


41.6 b 


2.9 


Individuals and others 


40.7 


36.0 C 


4.2 


PCA's and FICB's a 


-- 


9.8 


.5 


Commodity Credit Corp., loans held 


-- 


8.1 
100.0 


.4 


Total 


100.0 


10.8 



Source: Agricultural Finance Review, ARS, FERD, Washington, D. C, Vol. 21, July, 

1959, pp. 121, 134, 135, 145. (Percentages calculated by author.) 
a Including CCC loan guarantees. 
b All operating banks. 
c Nonreporting creditors. 

from national capital markets. The life insurance companies obtain 
their funds as a by-product of the sale of insurance. These latter 
agencies— the Federal Land Banks (FLB's), Production Credit Asso- 
ciations (PCA's), and the life insurance companies — as far as farmers 
are concerned, are able to provide unlimited amounts of credit. In 
other words, the supply of credit may be treated as infinitely elastic 
from the point of view of borrowers, as long as the lenders' quality 
standards are met. The rationing of funds by these agencies is on a 
quality basis, almost exclusively, rather than on a price basis. The 
supply of credit provided by banks and individuals cannot normally be 
thought of as infinitely elastic; therefore, it is rationed on both a price 
and quality basis. 

Federal Land Banks . The portion of the market the Federal Land 
Banks stand ready to serve is, and traditionally has been, restricted to 
high-quality real estate mortgages. Their quality standards have been 
such that their loss rates have been negligible on loans made since the 
Great Depression. Loss rates for the period of 1917 through 1940 
never exceeded 1 percent of outstandings and have averaged about one- 
half of one percent of outstandings (Table 3.2). Loss rates since 1940 
have been lower than those in the earlier period. 

A further indication of the quality of Land Bank loans can be gained 
by an examination of the loss experience of the Federal Farm Mortgage 
Corporation. Many second mortgages were made on Federal Land 
Bank first mortgages as well as first mortgages involving more risk 
than the Land Banks were permitted to take. Losses of the Federal 
Farm Mortgage Corporation on cumulative outstandings amounted to 
only 0.42 percent for the 1933-40 period, and 0.57 percent for the 



46 GEORGE K. BRINEGAR 

Table 3.2. Federal Land Bank Loss Rates, 1917-1940 





Cumulative losses to 






end of year as a 


Annual losses as 




percentage of cumulated 


a percentage of 


Year 


year-end outstandings a 


year -end outstandings 




(Percent) 




1929 


0.13 b 


0.42 


1930 


0.16 


0.40 


1931 


0.21 


0.60 


1932 


0.27 


0.95 


1933 


0.29 


0.52 


1934 


0.29 


0.26 


1935 


0.84 


0.70 


1936 


0.38 


0.73 


1937 


0.41 


0.76 


1938 


0.46 


0.93 


1939 


0.49 


0.94 


1940 


0.51 


0.80 



Source: R. J. Saulnier, Harold G. Halcrow, and Neil H. Jacoby, Federal 
Lending and Loan Insurance, Princeton University Press, Princeton, 
N. J., 1958. 

a Losses also include: throughout, charge-offs of principal and interest 
on mortgage loans; from 1935 through 1937, net increases in valuation 
reserves maintained against farms owned outright or in process of 
acquirement; and from 1938 on, net increases in valuation reserves 
covering both loans and real estate transactions. Losses are given 
net of recoveries from national farm loan associations resulting from 
their endorsement of loans. 
From year of organization, 1917. 

1941-51 period. Another measure of the high quality of Land Bank 
loans is suggested by their appraisal and lending policies. Since the 
Great Depression their lending policies have been tied to appraisals 
based on normal agricultural value. In terms of the current purchase 
prices of the properties, it has been unusual for the farmer to close a 
loan with less than a 50 percent equity. Thus, the Land Banks have re- 
stricted their lending to the low-risk portion of the market. 

The cost of borrowing from the Land Banks in terms of interest 
and service charges, not necessarily income foregone by the borrower 
through a restriction on the amount borrowed, has been less than for 
most other lenders. The second form of leadership shown by the Land 
Banks is in the length of loan. Land Bank loans have traditionally been 
for much longer periods than those of any other lenders with the ex- 
ception of certain subsidized loans of the Farmers Home Administra- 
tion. The efficiency with which the Land Banks have performed their 
job, in terms of costs per dollar loaned or outstanding, leaves little to 
be desired. In fact, their long-term record has been improved in re- 
cent years. 

Life insurance companies . The segment of the market served by 
the life insurance companies more nearly overlaps that of the Land 



STRUCTURE OF THE CAPITAL MARKET 47 

Banks than is the case with any other lenders. The major differences 
between the two are that the life insurance companies restrict their 
lending to the less risky types of agriculture, usually on a geographical 
basis; require less equity on the part of borrowers; charge interest 
rates slightly higher than the Land Banks; make loans of a larger aver- 
age size and for shorter periods. They, too, have had negligible loss 
rates on loans made since the Great Depression. The loss record of 
the life insurance companies was higher than that of the Federal Land 
Banks during the 1920 , s. This resulted, in a large measure, from the 
fact that they made a sizable number of mortgages on the basis of 
World War I prices and expectations. The Land Banks were just get- 
ting organized during this period, and consequently had lower losses 
than otherwise would have been the case. 

Insurance companies have been highly efficient in providing agri- 
culture with credit. The service charges are reasonable by any stand- 
ard applied. In fact, the farm mortgage departments of life insurance 
companies usually return a net yield somewhat less than the depart- 
ments making home mortgages. 

Production Credit Associations and Federal Intermediate Credit 
Banks. The market served by the PCA's and the FICB's overlaps that 
served by commercial and savings banks in the nonreal estate market. 
Loans by the PCA's can be for periods up to five years, though in gen- 
eral the terms are much shorter. The PCA's grant loans that are sig- 
nificantly larger on the average than comparable bank loans. 10 

The quality of PCA loans has been high. Their loss rates have 
been favorable as compared with the losses of national banks and 
country national banks. 11 (Table 3.3). These data suggest that the 
PCA's serve the well-established farmers, though these data alone are 
not inconsistent with other conclusions. No detailed data are presented 
on the lending costs of the PCA's, though their record of efficiency is 
also outstanding. 

Bank lending . Loans to agriculture by the banking system involve 
the extension of both real estate and production credit. Many serve the 
real estate market in a double role. They originate mortgages which 
are later sold to insurance companies and others. They also grant 
mortgages which they hold in their own accounts. In the nonreal estate 
credit markets, the banks' outstanding loans amount to over 40 percent 
of the market; thus, they serve several times as much of the market as 
the PCA's and FICB's. There is little reason to believe that the oper- 
ating costs of these lenders are out of line and that they are anything 
other than highly efficient in both their real estate and nonreal estate 
lending activities. 

Commodity Credit Corporation and Farmers Home Administration . 
These government agencies provide special credit services to agricul- 
ture. The credit operations of the CCC are a by-product of the 



10 Saulnier et al., op. cit., Table 34. (See Table 3.2, this volume.) 
J ll Ibid., Table 38. 



48 GEORGE K. BRINE GAR 

Table 3.3. Comparative Loss Rates of All National Banks, Country National Banks, 
and Production Credit Associations, 1936-1950 





Total losses 


Net losses 






of all 


of country 


Net losses 


Year 


national banks a 


national banks b 


of PCA's c 






(Percent) 




1936 


1.87 


1.37 


0.68 


1937 


0.82 


0.48 


0.28 


1938 


0.95 


0.42 


0.88 


1939 


0.74 


0.33 


0.46 


1940 


0.58 


0.31 


0.22 


1941 


0.44 


0.16 


0.14 


1942 


0.42 


0.05 


0.12 


1943 


0.43 


0.15 


0.12 


1944 


0.36 


0.22 


0.06 


1945 


0.21 


0.19 


0.03 


1946 


0.26 


0.12 


0.06 


1947 


0.34 


0.06 


0.10 


1948 


0.21 


0.10 


0.11 


1949 


— 


0.18 


0.22 


1950 


~ 


0.09 


0.08 



Source: Saulnier etal., op. cit., Table 38. (See Table 3.2, this volume.) 

a Calendar-year losses (before deduction for recoveries) as percentage of December 
31 outstanding. 

b For 1936 and 1937 fiscal-year losses as percentage of June 30 outstandings; there- 
after, refers to calendar-year losses and December 31 outstandings. Except for 
1936 and 1937 (when banks in 14 to 21 cities with less than three banks are included), 
the data are restricted to national banks other than those in reserve or central re- 
serve cities. 

c Actual plus estimated net losses for calendar year as percentage of average of 
month-end balances, with the 1949 and 1950 losses of taxable PCA's adjusted for the 
"general provision for undetermined losses." 

government price-support program. The nonrecourse loans and loan 
guarantees of the CCC are in general more in the nature of income 
than of borrowing. The FHA operates several credit programs, none 
of which are directly competitive with programs of other lenders. 
These programs were originally intended to be a means of filling one 
of the capital "gaps" in agriculture — that of providing credit to farmers 
who could not get credit elsewhere to establish reasonably efficient 
farming units. Borrowers were also provided with farm management 
services of a nature private lenders normally do not, and likely cannot, 
provide. Woodworth and Fanning, Hopkin, Engberg, Diesslin, Tootell, 
and Shepardson indicate in following chapters that such services are 
now being offered by private lenders, and the great need for expanding 
this assistance is prudent business and offers remunerative returns. 

The programs of the Farmers Home Administration have tended to 
shift in purpose, becoming similar to regular credit operations and 
losing their original purpose of aiding in the development of efficient 
farm firms. Murray presents a different viewpoint in Chapter 11. 



STRUCTURE OF THE CAPITAL MARKET 49 

FHA losses have varied widely among the various FHA programs. 
However, its record for low losses and low operating costs is impres- 
sive to even the most economy-minded persons when recognition is 
taken of the nature of the programs that were implemented. 

Individuals and others . Individuals and others supply 4.2 percent of 
the capital, accounted for in the Balance Sheet of Agriculture, used by 
farmers. This amounts to almost 41 percent of all real estate credit 
and 36 percent of all nonreal estate credit. 

The sectors of the market that individuals and others serve include 
low equity real estate loans and the financing of equipment, feed, and 
other items. No adequate picture is available, for the entire country, 
of how these credit suppliers fit into the capital markets serving agri- 
culture. 

All suppliers of credit . An evaluation of the performance of the 
groups supplying credit to agriculture reveals that they provide about 
11 percent of the total capital used in agriculture accounted for in the 
Balance Sheet of Agriculture. These groups effectively and efficiently 
serve the sectors of the market they try to serve. On the other hand, 
most lenders simply are not equipped to provide capital to agriculture 
on terms required to achieve an optimum allocation of capital. They 
often leave unserved such capital needs that cannot be adequately se- 
cured in terms of marketable assets. Thus, from the point of view of 
an optimum allocation of capital, there is little likelihood of a situation 
being realized where the costs of credit will come close to equaling the 
marginal returns from the use of credit. 



Other Suppliers of Capital 

The noncredit sources of capital used in agriculture can be largely 
traced directly to (1) various types of rental arrangements and (2) re- 
tained earnings along with gifts, inheritances, and capital gains. Capi- 
tal originating from these sources passes through and is influenced by 
the capital markets in varying degrees. The major question posed is: 
How effective are the capital markets in bringing about an optimum use 
of the capital originating directly from these two sources? 

Capital provided through rental agreem ents. The rental markets 
for agricultural land and other inputs are generally local and of great 
variety. Raup deals with this subject in greater detail in Chapter 9. 
The connections among these markets are indirect and exist through 
the national credit markets serving agriculture and the investment al- 
ternatives open to the people owning and renting these inputs. The 
capital provided to farm operators through rental agreements presum- 
ably must meet capital needs that are qualitatively different from the 
needs met by the national institutional lenders since their supplies of 
credit are infinitely elastic. 

An evaluation of the efficiency of rental contracts involves many 
considerations, though two seem to be of major importance, viz., 



50 GEORGE K. BRINE GAR 

(1) a farm operator is usually able to obtain more capital through 
rental agreements than in any other way, and (2) the difficulty of de- 
signing a rental agreement for the parties involved to share production 
costs and outputs in ratios that will lead to farm firms organized with 
maximum efficiency. The efficiency with which capital is allocated 
through the rental markets can in part be evaluated by inference, sub- 
sequent to noting several trends. 

Since the pressure for increases in the size of farms is great, the 
renting of farms could be expected to increase. However, this has not 
occurred. Thus it appears that the disadvantages of renting must have 
outweighed the potential efficiency. Moreover, even if the decrease in 
farm tenancy occurred as a direct result of relatively high farm in- 
comes during and following World War II, the fact remains that most 
farms are less than the optimum size. 

Capi tal provided through retained earnings . Most of the capital 
used in agriculture has been acquired from the earnings of farmers, 
including capital gains, along with inheritances and gifts. Spitze pre- 
sented data on this subject in Chapter 2. A complete analysis of how 
efficiently these assets are used would need to include a consideration 
of both household and firm problems. At one extreme the position is 
taken by some that since people use their capital in the way they do by 
their own free choice, an optimum use of the capital, all things con- 
sidered, must exist. While this view has its own logic, it ignores the 
existence of imperfect knowledge, markets, and the like, and further 
assumes away the resource allocation and equity problems flowing 
from accidents of birth, luck, etc. This situation does not exclude the 
possibility or the desirability of changes in capital markets or other 
institutions that will lead to a more efficient allocation of capital with- 
out any loss of freedom by farmers to do just as they please with their 
capital. This opportunity is an important part of the over -all challenge. 



ADEQUACY OF THE CAPITAL MARKETS FOR AGRICULTURE 

The capital needs of agriculture are examined from the standpoint 
of (1) the needs of individual farm firms; (2) the need for investment in 
people; (3) the needs of firms marketing agricultural products and sup- 
plies; (4) community needs; (5) the need for accumulating capital in the 
form of new technology; and (6) the needs of the agricultural industry 
as a whole. 



Individual Farm Firm Needs 

Numerous studies indicate that most farms in the United States — 
both commercial and low-income — are of less than the optimum size 
and/or are out of balance with respect to their capital-labor ratios. 
Thus, most farm operators are underemployed, secondary to 



STRUCTURE OF THE CAPITAL MARKET 51 

(1) unrealized economies of scale and/or (2) a shortage of capital rela- 
tive to labor, a matter of variable proportions. 12 In cases where un- 
deremployment of labor is secondary to unrealized economies of scale, 
other inputs are also underemployed. 

Elimination of underemployment of the first type requires more in- 
puts of all types in individual firms, while correction of the second type 
of underemployment requires more capital or less labor in the farm 
firm. 13 These problems have not been solved through the efficient op- 
eration of the capital markets. Moreover, existing capital markets 
likely offer little hope of meeting these problems — a conclusion sug- 
gested by the long period over which these underemployment problems 
have existed, and reinforced by new technology being developed for use 
in agriculture (cf. Chapters 14, 22, and 23). Thus it is concluded that 
existing capital markets have failed to come close to bringing about 
agricultural firms that either are of optimum size or that use the 
proper proportions of various inputs. 14 



Capital Needs for Investment in People 

The amounts of capital needed for investment in people will vary 
depending on the tests of need applied. If people in agriculture are 
considered as only economic inputs with no mobility, and thus no alter- 
native use, then the amount of capital invested in them is excessive. It 
is also likely true that agriculture would be more efficient if the exist- 
ing capital in people were concentrated in a smaller number of people. 
By this measure of need, more resources are being devoted to the 
health, education, etc., of rural people than is justified. 

If the assumption of immobility is relaxed, an inadequate amount of 
capital would seem to be invested in rural people. However, it would 
be economical to make additional capital investments in only those 
people who would be shifted to an alternative employment and in only 
the minimum amounts required to shift them. By this test of need, 
more capital should be invested by the local community in people in 
only those special cases where the marginal value product of rural 
people to the members of the community is negative; or by lenders 
only when it represents the most profitable investment alternative; or 
by the state or nation if a transfer of these rural people will contribute 
to the interests of the larger community by an amount greater than 
would any other investment of the required capital. Chapters 23 and 24 
deal with this problem in greater detail. 



12 The third type of underemployment, secondary to an overexpanded industry, would exist 
in pure form if all agricultural firms were of optimum size, using inputs and producing out- 
puts in optimum ratios. 

13 The logical alternative of reaching an optimum capital- labor ratio through a reduction 
in the amount of labor used in individual farms will seldom be appropriate because of the 
scale problem. 

14 Studies of the causal factors of why farmers use too little capital often reveal an un- 
willingness by farmers to use credit that is available. Thus, the problem is that of changing 
farmers' attitudes and/or changing the terms, etc., on which capital can be obtained. 



52 GEORGE K. BRINE GAR 

If rural people are considered as more than economic inputs or as 
ends, in an equalitarian society, the appropriate test of need for capital 
investment in people is changed. By this test the usual welfare criteria 
apply, and there seems to be little doubt that more capital should be 
invested in rural and nonrural people. 

Existing capital markets have not achieved adequate investment in 
people, nor do they appear likely to do so in the future. The reasons 
are several. First, people are "free" and cannot be bought, sold, or 
mortgaged as can other economic inputs. Thus the lenders of capital 
would have little security. This fact alone means the capital markets 
cannot operate effectively in this area. Since the usual capital markets 
cannot meet this need, most capital investment in people must come 
out of household income, either directly or indirectly, through taxation. 
This situation has not brung about, nor does it seem likely to bring 
about, an adequate supply of capital for investment in people. 



Agricultural Marketing Firm Needs 

The conclusions regarding the effectiveness of the capital markets 
in bringing about an optimum use of capital in agricultural marketing 
are not as clear-cut as is the case with individual farm firms and 
people. Two facets of this question are of interest, viz., that which 
concerns the scale and variable proportions problems within marketing 
firms and that which concerns the number and capacity of such firms 
in the aggregate. 

One evidence of an ineffective allocation of capital to agricultural 
marketing firms is the fact that farmers own sizable equities in agri- 
cultural marketing cooperatives. Since many individual farmers are 
inadequately supplied with capital and yet find it profitable to invest in 
marketing cooperatives, supplies of capital may be inadequate for this 
type of marketing firm. On the other hand, private marketing firms 
and individuals provide most of the inputs purchased by farmers and 
market most of the outputs produced by farmers. These firms, of 
great variety and size, have access to the same capital markets as 
other comparable businesses, which suggests no special problem in 
agriculture. This fact suggests that if a reconciliation is attempted, 
the capital markets serving nonagricultural industries will prove to be 
as inadequate in bringing about an optimum amount and use of capital 
as are the capital markets serving agriculture. 

Little information is available for evaluating the extent to which 
capital markets have progressed in supplying adequate capital to all 
marketing firms serving agriculture. However, if these marketing 
firms were optimumly organized, one would probably find that a more 
than adequate amount of capital has been allocated to this sector of 
economic activity. Thus, the problem, to the extent it exists, may well 
be an oversupply of capital to all such marketing firms in the aggregate 
but an undersupply to individual firms. 



STRUCTURE OF THE CAPITAL MARKET 53 

Community Capital Needs 

People engaged in farming, as well as others living in rural areas, 
place demands upon the supply of capital as members of a group dis- 
tinct from their individual needs. These capital needs are classified 
into three types: (1) demands by local government; (2) demands for 
resource development, of types exemplified by some programs of the 
Department of the Interior and the Rural Electrification Administra- 
tion; and (3) needs for the development of new industry in low-income 
agricultural areas. Sizable capital outlays are required for consump- 
tion, production, and capital accumulation to provide services to the 
members of a community. 

Local government needs . Capital requirements are primarily for 
roads and education. Local outlays for education — capital investment 
in people — can be used to illustrate a part of the capital problem in 
agricultural communities. Investment in education tends to increase 
underemployment for two reasons. First, resources devoted to taxes 
will decrease the amount of resources available for use by farm firms, 
and second, at a later date the capital requirements of optimum-sized 
firms will increase secondary to a new generation of more able farm 
operators. This, however, is not the end of the story, since higher 
levels of education will tend to increase labor mobility, thus setting 
the stage for the movement of people from agricultural to nonagricul- 
tural employment. Underemployment of the third type (secondary to an 
oversized industry) will then be decreased. 

The flow of capital into education is almost exclusively determined 
by the incomes of the members of the community, yet the yield from 
such investments is likely negative in its correlation with community 
income. Therefore, capital investments by community groups are not 
likely to be allocated among communities in anything close to an opti- 
mum pattern. Nor, given existing capital markets, does it seem likely 
any significant improvement can be made. As a whole, existing capital 
markets are unable to cope with this type of capital need. This con- 
clusion is similar to Mackie's in Chapter 22. 

Community resource development needs . These needs have been 
met historically by many blends of private and government activity. At 
one extreme is the direct government program where the funds have 
been provided by the federal government, e.g., the Rural Electrifica- 
tion Administration; at the other extreme are the private endeavors. 
Between these extremes are a great variety of programs involving dif- 
fering amounts of public aid, such as land grants to the railroads, 
federal credit programs, and the like. 

Any attempt to evaluate whether too much or too little capital has 
been directed into programs of these sorts would be a major under- 
taking. This is an area where the private capital markets can play an 
important role, especially when varying types of federal loan insurance 
and loan guarantees can be employed. 

Capital needs for new industry. These needs reflect an opportunity 



54 GEORGE K. BRINE GAR 

to increase efficiency by moving employment to people rather than by 
moving people to employment. That such opportunities are available is 
not a question of doubt. The real questions are how much, in what 
places, at what rates, and by what methods shall capital be invested in 
new industries. It is clear that the capital markets have not operated 
in the past to prevent the problem of bypassed low-income communi- 
ties. The extent to which existing capital markets can meet this type 
of problem is not so clear. Perhaps the question of greatest interest 
centers on the measures that can be taken to make the capital markets 
more effective in -bringing about an adequate total supply and distribu- 
tion of capital to ameliorate this type of problem. 



Needs for New Technology 

The capital devoted to the development of technology employed in 
agriculture is generally recognized as highly productive. In fact, the 
income woes of agriculture are now quite commonly ascribed to the 
high rate of technological development (cf. Chapters 6 and 7). This 
view is correct in a superficial way in that an absence of modern agri- 
cultural technology would increase the prices of agricultural commodi- 
ties. In a meaningful economic sense this view is incorrect because it 
implicitly assumes no alternative use for other agricultural inputs. 

The amount of capital allocated to the development of technology is 
either excessive or inadequate, depending on the yardsticks employed. 
It is excessive if we consider how primitive the technology of food 
production should be, assuming no outward mobility of inputs used in 
agriculture, if returns to people employed in agriculture are to be 
similar to that earned by others in nonagricultural employment. On 
the other hand, assuming perfect mobility of agricultural inputs, the 
flow of capital to the development of technology has been inadequate in 
the past. An adequate evaluation of the extent to which capital needs of 
agriculture for the development of new technology are being met re- 
quires, in addition to the usual costs and returns calculations, analysis 
of the costs of increasing input mobility, especially people. Such an 
analysis would indicate an inadequate accumulation of technological 
capital and an inadequate flow of capital for the development of new 
technology. 



Agricultural Industry Capital Needs 

The total capital need of agriculture is examined with reference to 
two measures of capital need, viz., (1) capital requirements for the 
production of adequate supplies of food and fiber, and (2) the over-all 
problem of an efficient organization and structure for agriculture. 

Capital needs for an adequate supply of food and fiber . Given the 
existing supply and demand for food and fiber, the amount of capital 



STRUCTURE OF THE CAPITAL MARKET 55 

used in agriculture is more than adequate. This is an implication (by 
definition) of existing agricultural surpluses, since a surplus in a 
meaningful economic sense can exist only when the allocation of re- 
sources is excessive in the sector of the economy under considera- 
tion. 15 To the extent that surpluses exist, the capital markets have not 
operated in a way to bring about an allocation of capital to agriculture 
in an optimum total amount. 

Capital needs for an efficient agriculture. Assuming that changes 
were to be made so that the optimum number of firms would be in agri- 
culture, that each firm would be of optimum size, and that each firm 
would employ inputs and produce outputs in optimum ratios, major 
changes would be required in the allocation of capital. These changes 
in capital allocation would require shifts within agriculture and be- 
tween agriculture and the rest of the economy. The exact picture of an 
agriculture in equilibrium cannot be specified, nor is such an exact 
specification needed in this context. This much of the picture seems 
clear and useful for the purposes at hand: (1) fewer people would be 
employed in agriculture, though the amount of capital invested in each 
of these people would be increased; (2) most land would continue in use 
since its alternative uses are few; (3) improvements on land, except for 
the housing of farm people whose numbers would decrease, would likely 
increase; and (4) the use of capital in other inputs would increase. 
Thus, the major adjustment requirement within agriculture is that of 
increasing the average size of farms, while the major need between 
agriculture and the rest of the economy is a transfer of people out of 
agriculture. 

Major gains in the efficiency with which capital is allocated requires, 
in addition to the movement of people out of agriculture, increased 
amounts of capital on terms not now available and for purposes not 
being met. The new terms must be such that potential marginal yields 
from the use of capital will serve as the major rationing principle 
rather than tests such as equity ratios. This problem is most likely as 
difficult to solve on the demand side as on the supply side of the market, 
as is evidenced by farmers' reluctance to borrow even when marginal 
yields are high. Methods must also be worked out so that more capital 
will be available in adequate amounts for such neglected purposes as 
investment in people, the development of new technology, resource de- 
velopment, etc. 

When answers to this challenge are being sought, likely first places 
to look will include methods whereby (1) the total supply of capital can 
be made responsive to changes in demand, (2) gaps in the capital mar- 
kets can be closed, and (3) greater efficiency can be achieved in the 
operations of individual suppliers of capital. This is a major challenge, 
probably one that cannot be met by existing capital markets. 



1 This seems to be the level of sophistication at which people are thinking when they 
suggest fewer resources should be devoted to the development of new technology, that credit 
or education should be restricted, etc. 



56 GEORGE K. BRINEGAR 



Discussion 



IVY W. DUGGAN* 

In determining capital needs of agriculture, Brinegar includes not 
only the capital items in the Balance Sheet of Agriculture, but also 
adds capital embodied in people, community facilities (such as schools, 
roads, and dams), marketing facilities, technology, and certain activi- 
ties centered in bringing farmers various items used to produce food 
and fiber. He carries these non-Balance Sheet items all the way 
through his discourse, which makes it difficult for this discussant to 
comment on them briefly and devote adequate time to the discussion of 
capital items in the Balance Sheet. 

People reared and educated on the farm have required income that 
would have been used in other ways had they been reared and educated 
elsewhere. Investment in the numbers of people who have left the farm 
has drained capital away from agriculture. The cost of rearing and 
educating the children of workers in a textile mill is paid for from the 
income of the workers and is not capitalized in the mill capital. Also, 
to an increasing degree, many of the states are collecting more taxes 
for education from the general public and allocating the funds on a 
pupil — or similar — basis. The capital embodied in people is consid- 
ered in greater detail in Chapter 22. 

The assembling, transporting, warehousing, processing, and distri- 
bution of food and fiber are not generally performed by the farmer. 
Businesses carrying on these activities are important and require 
capital, but, with the exception of cooperatives, farmers generally have 
little, if any, capital invested in them. The same holds true for the 
businesses supplying farmers with inputs used in agricultural produc- 
tion. 

The remainder of this discussion is confined to the structure of the 
capital market for agriculture as an industry and primarily the com- 
mercial farms in the industry. Also, pertinent remarks will be con- 
fined to only the items included in the Balance Sheet of Agriculture. 
The Balance Sheet of Agriculture includes the capital of part-time, 
low-income, and subsistence farmers. However, I would assume that 
the capital of the commercial farms represents a rather high percen- 
tage of the total capital accounted for in the Balance Sheet. 

Sociologically, subsistence and part-time farmers and nonfarm 
rural people are important, but their hope of betterment is mostly out- 
side of commercial agriculture, as indicated in Chapters 14 and 22. 
These people contribute little to the agricultural industry. 

In the second paragraph, Brinegar states *. . . that existing capital 
markets have not been, and are not effective in providing an adequate 



♦Vice-President, Trust Company of Georgia. 



DISCUSSION 57 

amount for achieving an efficient use of capital in agriculture. * It ap- 
pears that capital markets have contributed to the sharp reduction of 
manpower on farms from 1910 to 1959. At the same time, total output 
has almost doubled. During this period, farms increased in acreage 
and intensity of cultivation, and there was a rapid increase in the use 
of mechanical power and machinery, fertilizer, and other purchased 
inputs. This subject is developed in Chapters 6 and 7. Capital alloca- 
tion contributed to all of these changes. Of course, research, educa- 
tion, and technology made their contribution to the dynamic changes 
that took place. 

Productive gains in agriculture compare most favorably with the 
most progressive industries in the country. Efficiency in agriculture 
has increased for a number of years at a rate in excess of 2 percent a 
year. While capital is important, it appears that Brinegar overempha- 
sized the role of capital in bringing agriculture to optimum efficiency 
and in achieving optimum allocation of resources (including people) 
within agriculture. 

I am not too concerned about the lack of "know-how" in marketing 
capital, and especially credit. If the profits are high and if the risks 
are not too great or even supposed not to be, suppliers of credit will 
find ways of marketing their services. When banks were ultraconserv- 
ative, they wanted little of the consumer credit business or installment 
loan business. In the meantime finance businesses have grown up all 
over the country and some have become national in scope. Banks are 
competing intensely to put personal loans and installment loans on 
their books, as demonstrated by the ads in newspapers, on radio and 
television, and in mailed literature. 

Banks formerly contended that such loans were too expensive to 
make and serve, and that they were too risky. They have found that in- 
stallment loans are more profitable than some of their other business. 
If the profit is there, someone will learn how to get it and will take the 
risks involved. 

Let us return to the question of the importance of capital allocation 
to and within agriculture. Capital is drawn by conditions in an indus- 
try; it does not make the conditions. Rate structure design for public 
utilities, tariff laws, tax laws, price supports in agriculture, and fair 
trade laws all affect anticipated income and profits, which in turn affect 
the amount of capital which will be made available. 

Institutional lenders are extending to agriculture types of credit 
which they did not extend only a few years ago. Some may be indirect, 
as in the case of integration. Large amounts of credit are supplied to 
feed mills which, in turn, extend credit to broiler producers. Broiler 
production in Georgia increased from 500 thousand birds in 1935 to 303 
million birds in 1959. The two most important factors contributing to 
this increase were the capital and management supplied by the inte- 
grator. Integration will probably continue to have even more effect on 
allocation of capital to and within agriculture. This subject is covered 
more fully in Chapter 8. 



58 GEORGE K. BRINEGAR 

It appears that Production Credit Associations and other suppliers 
of short-term credit are giving more weight to earning prospects and 
less to security offered than they have in the past. However, there are 
some indications that commercial banks are not going as far as Pro- 
duction Credit Associations. 

As Brinegar stated, most of the capital used in agriculture has 
been acquired from the earnings of farmers, including capital gains, 
along with inheritances and gifts. Farmers, as a group, are willing to 
save a larger portion of their earnings than other groups. It is likely 
that farmers will continue to acquire a rather large proportion of equity 
capital from retained earnings in the f uture» 

It would seem that improving the allocation of short-term credit to 
commercial agriculture in order to meet future needs should not be too 
difficult, provided farmers can earn reasonable returns on their labor, 
management, and capital. Improving the allocation of long-term credit 
will probably be more difficult. One way that might be worthy of ex- 
ploration would be to extend the length of mortgages or move in the di- 
rection of permanent farm-mortgage debt and smaller annual payments, 
as suggested by Diesslin in Chapter 13. Of course there are other 
ways. 

Improving the allocation of equity capital may be even more diffi- 
cult. Inflation, partly due to overallocation of capital to land, that has 
resulted in high land prices compared with returns on land; the over- 
expansion of the agricultural plant in relation to present effective de- 
mand; the accumulation of surpluses; the declining farm income; the 
large amount of operating funds required in farming today; the drain on 
capital by children leaving the farm; and the settlement of the estates 
of farmers are all problems that evidently are not easily solved. It is 
to be hoped that the land-grant colleges, the Farm Credit Administra- 
tion, the insurance companies, and others will carry on much additional 
research regarding equity capital allocation to and within agriculture. 

SIDNEY D. STANIFORTH* 

Brinegar's discourse deals with an evaluation of the structure of 
the capital market relative to our present and future needs. It starts 
with an inspiring challenge to be creative and imaginative in developing 
means of meeting our capital problems. It concludes by stating that the 
existing capital markets have not been effective in meeting these needs, 
but disappointingly turns to the "people with an interest in capital mar- 
kets to carry leadership in meeting this challenge. * This understates 
the responsibility and role of agricultural economics research in the 
land-grant colleges and the U. S„ Department of Agriculture. 

Chapter 3 is thorough and rigorous with respect to the framework 
within which it analyzes the sources, suppliers, and needs of capital in 
agriculture. By confining the analysis within the framework of long-run 



♦Associate Professor of Agricultural Economics, University of Wisconsin. 



DISCUSSION 59 

equilibrium and by retaining a relatively high degree of aggregation, 
however, Brinegar excludes many important operational questions. 
The conclusions about the role that credit can play in agricultural ad- 
justment problems is, I think, significantly different as well. 

Capital needs are measured against the requirements of a complete 
equilibrium adjustment in the long-run sense. In the long-run equilib- 
rium sense, we can accept the conclusion that "the major adjustment 
requirement within agriculture is that of increasing the average size of 
farms, while the major need between agriculture and the rest of the 
economy is a transfer of people out of agriculture, " If we shorten the 
time period to the life span of those people now engaged in farm pro- 
duction, however, I feel we would reach different conclusions as to 
what can be done. This problem is then approached from the starting 
point of the existing situation of resource availability and use in agri- 
culture. From there one proceeds into a relatively large number of 
categories of farmers classified according to their potential oppor- 
tunities. 

We can expect a continued, if not more rapid, increase in the aver- 
age size of farm within the so-called commercial sector of agriculture. 
But people can be expected to move out of agriculture primarily as 
young people are discouraged from entering farming, or we might say, 
by failing to replace the loss of operators through retirement and 
death. A secondary movement will occur, of course, as people cur- 
rently employed in agriculture enter nonfarm employment, either di- 
rectly or through part-time farming, but this opportunity is limited by 
the age and training of the farm people involved. Even if direct move- 
ment of underemployed people out of agriculture were not limited for 
these reasons, we could not expect to create the several million addi- 
tional new jobs that would be necessary to employ all people who could 
be released from agriculture. In dealing with the adjustment problem, 
then, we need to recognize the fact that a large portion of the people 
who are now underemployed in agriculture are going to make changes 
within a rather restricted context. In some areas the low-income group 
is a very significant portion of the total farm population. The quantity 
of capital needed by this group is not large, but the manner in which it 
is made available is very important. 

Looking at the problem from this point of view, the challenge is to 
create economic opportunity for people now underemployed in agricul- 
ture. To be consistent with the total requirements of adjustment, these 
opportunities must be considered in four general areas: developing 
economic-sized farm units, moving into completely nonfarm opportuni- 
ties, transitional or partial movement to nonfarm opportunities through 
part-time farming, and what might be called a salvage or rehabilitation 
operation for those who are restricted from the first three. The role 
of credit in this approach to adjustment has been defined in the concept 
of development credit. 

While the creation of economic opportunity is the defined essence 
of development credit, it usually involves some method of providing 



60 GEORGE K. BRINE GAR 

management along with credit to assure the achievement of potential 
productivities and to permit loans to be based primarily on future pro- 
ductivities rather than on present equities. Both of these components 
are recognized by Brinegar, but are not brought effectively to bear on 
the role of credit in agricultural adjustment. 

If this alternative standard of reference is used in evaluating the 
job being done by suppliers of credit, loss ratios, interest rates, and 
efficiency of internal administration become quite secondary measures 
of effectiveness. In fact, these measures in many cases have been kept 
to "high quality" standards through conservatism, which restricts 
economic opportunity. Many pioneers among commercial bankers and 
the Federal Land Banks tend to lend by conservative standards. The 
Production Credit Associations in some areas are also more reluctant 
to offer development credit even though they have a field staff to serv- 
ice such credit ventures. They have, instead, significantly expanded 
so-called high quality loans by picking up accounts receivable from 
farm supply businesses. On the other hand, the Farmers Home Ad- 
ministration and its predecessors, from the time of relief and rehabil- 
itation loans of the 1930's through development and expansion loans of 
the 1940's to adjustment loans in 1959, have created superior economic 
opportunity for those whose security does not meet commercial stand- 
ards. Their role in development credit certainly cannot be measured 
by their percentage share of the total credit market alone. 

The pioneering venture of the Farmers Home Administration has 
shown that the idea of development credit can work. Lenders and agri- 
cultural economists should be equally concerned with methods of ap- 
plying this valuable experience in developing a completely commercial 
service that will give all farmers the benefit of what has been learned. 
This is largely a matter of how to incorporate management assistance 
with credit in an effective working package. This problem is not a 
simple choice between the slow but sound method of farm management 
education, on the one hand, and the quick but less desirable method of 
contract farming, on the other. The subject is developed more fully in 
Chapters 11 and 23. 

It is encouraging to see rental agreements treated as another 
source of agricultural credit in a broader context of resource acquisi- 
tion, much as was done by the late Professor Hibbard in his work on 
credit and leasing. The conclusion that leasing or rental arrangements 
are not now serving as an effective means of resource acquisition is 
difficult to refute although the percentage of farms held by lease may 
bear little relationship to the function being performed by leasing in 
resource acquisition. The fact that leasing is discarded immediately 
as an effective means of resource acquisition characterizes a common 
restriction of effective opportunity arbitrarily imposed by the re- 
searcher. This, in fact, concedes that because leasing has not per- 
formed an effective function it will not do so. One of the major chal- 
langes in the field of resource acquisition and resource allocation lies 
in changing these institutions to enable them to serve the requirements 
of an economically adjusting agriculture. 



Chapter 4 



LEE R. MARTIN 

University of Arkansas 



Changes in Capital 
Productivity and Over- 
All Capital Problems 1 






AGRICULTURAL ECONOMISTS are in general agreement that the 
United States will not need the additional product resulting from 
increased efficiency in southern agriculture even by 1975. 
Therefore, if we are concerned with efficiency of capital use and capi- 
tal markets in the South, it must be because we are concerned with the 
low-income effects of nonoptimal use of capital or of nonoptimal func- 
tioning of the market for capital funds or capital forms. 

The fourth edition of Samuelson's Economics defines capital goods 
as goods " produced by the economic system itself to be used as pro- 
ductive inputs for further production of consumption and other goods 
and services." 2 Embodied capital (the term capital goods is dropped 
because it implies tangible goods) is a productive input in the sense of 
adding to production in the process in which it is used. It yields its 
stock of services over a period of time, rather than within a given pro- 
duction period as some other productive inputs do. Thus, the two sig- 
nificant aspects of embodied capital are productivity and the time pe- 
riod over which the productivity effects are felt. 

Among the concepts developed for understanding and analyzing the 
use of all productive inputs (including embodied capital) is marginal 
revenue productivity, or marginal value productivity. This is the (net) 
increment to income from using another unit of the input. In the case 
of land, it is the additional (net) income a farmer earns by using the 
last acre of a given quality in production. 3 

This concept is an important part of the production function. We 
take as the production function 

Y = f (X x , X 2 , X 3 . . . X n ) 

with the quantities in physical terms. The marginal physical return to 



1 Published with the approval of the Director, Arkansas Agricultural Experiment Station. 
The author is indebted to Lloyd D. Bender, James H. White, Calvin R. Berry, and Henry J. 
Meenen for constructive criticisms and suggestions. 

2 Paul A. Samuelson, Economics — an Introductory Analysis, 4th ed., McGraw-Hill Book 
Co., Inc., New York, 1958, p. 576. Also, see Spitze's treatment of the meaning of capital in 
Chapter 2. 

3 In agricultural economics, MVP is sometimes computed as additional net income to the 
farmer's owned factors. 



61 



62 LEE R. MARTIN 

6 Y 
the ith factor will be t^t for the last unit of Xi used. If the incre- 

OXi 

mental units of Y will bring a price of Pj , then the marginal revenue 

6 Y 
product of Xi is Pj -r^r at the appropriate values of X and Y. 

Is the production function an average of what all farmers can do? 
The actual production functions on which evaluations of the capital and 
credit situation are based are likely to have considerable normative 
content. The function is usually either an estimate of what better 
farmers can do, or an intuitive, and perhaps subconscious, estimate by 
the researcher of what level of productive efficiency will result in 
some hoped-for return. Do we consider how many low -income farmers 
can in fact manage to achieve the input -output relations assumed, to 
say nothing of the other components of farm management? It is likely 
that the problem is assumed away when we assume normative input - 
output relations, or assume without question that the Extension Service 
can miraculously raise management abilities substantially. Consider- 
able investment in these human resources will be necessary before 
they can achieve the assumed results. This point of view is in agree- 
ment with Mackie in Chapter 22 and Woodworth and Fanning in Chap- 
ter 23. 



PUBLIC CAPITAL 

Economic productivity in the aggregate and for the individual is a 
function of personal (or intangible) capital as well as of material capi- 
tal. National product during a given time period would seem to be a 
function of capital investment embodied in human beings, their number, 
as well as of investment in stocks of material capital goods, and of the 
supply of natural resources. Because of the importance of technology, 
even the stock of natural resources at any given time is a function of 
cumulative past investment in human resources. 4 If investment in 
humans is this important, why have economists neglected it? It has 
not been completely neglected. Students of economic development from 
Adam Smith to John Rae to Kenneth Galbraith have discussed this form 
of investment, but no one has succeeded in developing a precise mathe- 
matical model. No easily applied criteria have been developed for de- 
termining the optimum amounts of such investments, to say nothing of 
the allocation of optimum amounts among different claimants. 

Another possible reason why human investment has not received as 
much attention in the United States is that it has only grown into such 
vital importance since 1900. That is to say, the level of investment 
was not far below optimum until after the beginning of the twentieth 
century (considering all known technology as of the point in time). 5 The 



4 Technically, natural materials were always on hand but either were not discovered or 
their value was not recognized until changes in technology took place. 

5 It is perhaps more accurate to say that even the increased rate of human capital for- 
mation in recent years was not large enough to provide for optimum combinations of factors. 



CHANGES IN CAPITAL PRODUCTIVITY AND PROBLEMS 63 

present emphasis on trained manpower is illustrated by estimates of 
future manpower needs in terms of skill and training. Mackie docu- 
ments this trend in Chapter 22. 

There are other than economic reasons for making some of the 
more important types of investment in human resources. This is es- 
pecially the case for investments in education and health. As long as 
other reasons led decision -makers to choose levels of investment that 
were reasonably near the optimum, there was no practical economic 
problem. Now that deviations from optimum seem to be large and sig- 
nificant, investment in the human resource has become a factor limit- 
ing the rate of economic growth. 

Research shows that increases in the volume of inputs used in pro- 
duction (conventionally measured) do not account for a very large pro- 
portion of the growth in total output since about 1910. Among writers 
on the subject, there is considerable agreement that such intangible 
factors as education and training, health, research, and similar factors 
are responsible for a good deal of the unexplained growth in output. 6 

Two ways that investment in human resources affect economic 
growth are mentioned briefly. Economic growth is associated closely 
with the rate of development of technology; this in turn is a function of 
investment in education and research. The effectiveness of investment 
in research is reduced if investment in education is not adequate. The 
division of expenditures between basic and applied research needs also 
to be optimum in order to maximize the effect on economic growth of a 
given investment in human resources. 

Economic growth is also closely linked to the rate of adoption of 
developed technology. This rate is certainly affected by investment in 
education. Both quantity and quality of educational investment would be 
among the determinants of adoption rates, and of course there are 
other factors. Basically, the problem with low-income farmers seems 
to be that of increasing their learning rate enough to enable them to 
cope with rapid flows of technical information (cf. Chapters 22 and 23). 

Information is available on state differentials in levels of invest- 
ment in human resources. Several kinds of state data on investments 
in human resources are presented in Table 4.1. These data indicate 
rather dramatically that investments in the human agent (particularly 
in youth) are quite low in the South Atlantic, East South Central, and to 
a slightly lesser degree in the West South Central states. Low levels 
of human investment are associated with high rates of rejection by Se- 
lective Service. Data on the percentages of income going to higher 
education and local schools show that most of the southeastern states 
are slightly above the national average and are well below the percent- 
ages of the leading states. From these and other data it is apparent 
that marginal productivity of public investment (particularly in the 



6 For a full discussion of the role in productivity of human, social, and community capital; 
for tentative definitions; and for references on the subject, see Lee R. Martin, The Use of 
Federal Credit for Human Capital Formation, memorandum prepared for the Commission 
on Money and Credit, 1960, Chapter ii, Section C. 



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66 LEE R. MARTIN 

human agent) in the South is quite high. With slightly greater sacri- 
fices than other states are now making, low-income states could bring 
their human capital much nearer the optimum. 



PRIVATE CAPITAL 

Several characteristics of the existing structure of agriculture are 
very important in the problem of obtaining optimum combinations of 
factors, including capital in all forms. Institutions for separating pro- 
vision of capital funds from dec is ion -making are not as fully developed 
in agriculture as they are in manufacturing, trade, insurance, trans- 
portation, communications, and mining. In farming, with only a few 
important exceptions, these two functions (providing capital and man- 
agement) are performed by the same individual. Considerable tenancy 
remains in agriculture, but it is still regarded as a step on the way to 
full ownership, particularly by tenants themselves. The volume of cash 
renting is increasing— largely in the form of renting additional land to 
supplement land owned. Hiring custom services is now more important 
in agriculture and is another capital -saving device for farm operators. 

Finally, vertically integrated systems including farm production 
have developed rapidly in broilers, table and hatching eggs, turkeys, 
feeder pigs, and processing vegetables, among others. However, this 
device has not been used so much to enable management to be sepa- 
rated from the provision of capital as it has to remove most of both 
functions from the farm. For example, broiler growers furnish pro- 
duction labor, a little capital and management, and bear some, but not 
all, of the risks associated with the market. 

By and large, farming is still characterized by having management 
and ownership of the farm's resources in the same individual. This 
functional rigidity magnifies the importance of investment in those 
human agents who own the material farm capital. Failure to invest 
adequately in even 10 percent of the farm resource owners will affect 
resource use efficiency and incomes of the farm resource owners 
themselves. When the human capital embodied in the farm resource 
owners in the South is inadequate for more than half of them (as the 
author believes), then the implications become much more serious, 
particularly for the underprivileged group itself and for that region 
having more than its share of underprivileged managers. 

As far as getting the optimum quantities and forms of capital under 
the control of farm operators is concerned, estimates of capital pro- 
ductivity on farms must be worked out for the combination of farm op- 
erator and physical resources under his control. Any mechanical esti- 
mates of productivity of physical resources by themselves are likely to 
be far wide of the mark in the southeastern states. Lending agencies in 
these states are likely to be ultraconservative in making farm loans 
because of the difficulty in judging the quality of the human factor in 
the production relationship. Because of the great importance of the 



CHANGES IN CAPITAL PRODUCTIVITY AND PROBLEMS 67 

quality of the human factor, the a priori probability may be small for 
selecting a combination of farm and farmer for whom the combined 
marginal value productivity of capital would be high enough to justify 
investment of capital funds. In low-income areas this situation is 
likely to lead to rules of thumb (in terms of collateral, etc.) that do not 
give the really competent individual with few resources the same op- 
portunity to become a decision-maker that good managers have in the 
nonfarm sectors. 

Even when average capital productivity in a given area is relatively 
high, the lending agency cannot average out the high returns possible 
for good managers with the negative returns for managers who only ap- 
pear to be good. An unsubsidized lender must be very successful in a 
low -income area, or else he will become bankrupt. 

In the past, the Extension Service and other educational agencies in 
agriculture operated on the philosophy that a farm operator with a 
moderate amount of potential for management could, by means of in- 
tensive technical assistance, be brought to a level of efficiency that 
could be maintained with information flowing normally through estab- 
lished communications channels. The flow of new technical agricul- 
tural information has become so large and steady— and often so com- 
plicated—and the income penalties for not operating farms near the 
economic optimum so great that many farmers in low -income areas 
may not be able to operate a large resource bundle efficiently. Farm 
situations lending themselves to piped-in management are already be- 
coming parts of vertically integrated systems. Situations not adaptable 
to piped-in management require decision -makers representing enough 
human capital that they can, with extensive assistance from the Exten- 
sion Service and other agencies, obtain and interpret the flow of rele- 
vant technical information well enough to make near -optimum economic 
and technical decisions. 

One field of science relevant to farm decision -making is learning 
theory, (cf. Chapter 20). For an individual decision -maker, the vital 
factor is the rate at which he learns. During a period of gradual change 
in technology and culture, the required learning rate may not be very 
high. In a period of rapid change, the essential learning rate grows in 
several dimensions. Not only do the volume and nature of information 
change rapidly, but information channels themselves are in a state of 
flux. Criteria for selecting the relevant information change drastically. 
The practical simplifications (rules of thumb) that proved so helpful in 
a more static period become useless and confusing. Techniques for 
optimum application of the relevant information grow in complexity. 
How can an individual achieve the required learning rate? Success in 
formal education requires a certain rate, and once acquired, this abil- 
ity to learn at a given rate can be maintained and perhaps made more 
effective by continued application to flows of information from all 
sources. 

It is only a slight oversimplification of our farm situation to state 
that the technological revolution increased considerably the learning 



68 LEE R. MARTIN 

rate that is essential for farmers to make near -optimum decisions. 
Are there not a large number of farmers (especially in the South) whose 
formerly satisfactory learning rate is now inadequate? On their own, 
these farmers have not been able to step up their learning rate enough 
and no completely effective means for helping them has been developed. 
Even the lack of motivation to change (pointed out so sharply and fre- 
quently by sociologists) may be a psychological reaction of inadequacy 
brought on by intuitive recognition of inability to achieve the required 
rate. Has not our approach been too much one of imparting a given 
stock of information rather than one of developing the ability to use 
flows? 



Capital Productivity in a Sector with Overcapacity 

Still another situation complicates the problem of achieving opti- 
mum combinations of factors. The marginal revenue product of another 
bale of cotton or of another bushel of wheat is probably negative in the 
minds of some policy -makers. To our society, these marginal values 
are probably well below present support prices. There is no certainty 
that future prices will move nearer to free market levels. Yet, forced 
to guess whether prices are more likely to move nearer to or away 
from free market prices, most agricultural economic analysts would 
select the former. If price projections obtained by Iowa State Univer- 
sity researchers 7 or findings published in 1960 in Senate Document 77 
are reliable, freer markets would bring lower prices. Even for farm 
commodities that will continue to have price supports, the outlook is 
generally for lower support levels. 

What effect does this outlook have on lenders with their problem of 
pricing the additional output that will result from the use of additional 
capital? Whether farm management analyses are made with the use of 
budgeting or linear programming, the problem of pricing additional out- 
puts during the investment period becomes more and more perplexing, 
particularly if estimated farm incomes are to be compared with in- 
comes in the nonfarm sector. If declining prices are in prospect for 
most farm products, will not physical productivity of embodied capital 
have to be higher than before for given capital investments to be eco- 
nomical? 

A similar effect results from increases in interest rates. With 
higher interest rates, profitability requires greater physical produc- 
tivity from a capital form. For a capital good estimated to increase 
income by $100 a year for ten years, the present value of the income 
generated would be $810 if the future income is discounted at 5 percent, 
and only $766 if the discount rate is 6.5 percent. Thus the physical 



7 Leon E. Thompson, "Return to a free market," Iowa Farm Sci., Vol. 14, No. 10, pp. 
16-18, April, 1960. Some of the work of Paulsen, Kaldor, Shepherd, Kutish, Heifner, and 
Futrell are summarized by Thompson. 



CHANGES IN CAPITAL PRODUCTIVITY AND PROBLEMS 69 

productivity of a capital good would have to be almost 6 percent greater 
for profitability with an increase in discount rate from 5 to 6.5 percent. 

Low -income farmers are faced with still another capital problem. 
A capital investment is justified if the sum of the discounted future net 
benefits exceeds present net cost. From the lender's viewpoint, the 
availability of greater future incomes out of which principal can be re- 
paid is a necessary but not a sufficient condition for a good loan. If the 
increase in income is just enough for principal repayments and inter- 
est, the family must postpone any increase in its living standard in 
order to accumulate capital. If the capital investment does not add 
enough income to allow some increase in consumption, risks of defaults 
on payments are likely to be rather high. 

An examination of the experience of the Farm Security Administra- 
tion in lending to farm families in the Georgia Piedmont gives some 
idea of the potential for small farm operators to accumulate capital in- 
ternally. When prices were adjusted to the 1948 level, the average of 
76 families making enterprise adjustments increased net cash income 
by $500, increased cash living expenses by $300, and had $200 in addi- 
tional cash income. 8 Thus 40 percent of the additional income was 
available for capital accumulation. Only in the case of one type of ad- 
justment was the amount left for investment more than half of the gain 
in income, and this was accounted for by a small gain in net income in 
a form that was not available for consumption. Those families whose 
enterprise combinations yielded highest net incomes had the lowest 
average percentage of additional income available for capital accumu- 
lation. For these Georgia families, the marginal propensity to consume 
seemed to rise with growing incomes. This indicates an understandable 
reluctance on the part of low -income families to postpone the "better 
life" until much capital formation has taken place. 

This has unusual relevance to the problem of capital formation in 
agriculture since the capacity of low -income farmers to accumulate 
capital out of net income is quite limited. Spitze indicates the impor- 
tance of net farm income in capital formation within agriculture in 
Chapter 2. Hendrix's data indicate that low -income farmers will be 
able to achieve larger scales of operations (and higher incomes) only 
by means of capital made available from off the farms. Repayment of 
external capital may require lower marginal propensities to consume 
than can reasonably be expected. 

One might speculate that an amount of external capital is needed to 
provide a take-off into income growth for low-income farmers. This 
amount may be substantial, and might enlarge the scale of operations 
more rapidly than managerial ability can be assisted to accommodate 
this growth. Yet a large lump of capital may be required in order to 
increase income enough to allow simultaneously a minimum increase in 
consumption, repayment of capital, and future capital accumulation 



8 W. E. Hendrix, Capital Accumulation by Families on Small Farms in the Piedmont, 
Ga. Agr. Exp. Sta. Bui. N.S. 8, Aug., 1955, pp. 20-22. 



70 LEE R. MARTIN 

from net income. In one decade, external capital made available to 
farmers was only one -ninth of internal capital formation (cf . Chapter 2). 
In the past, capital formation from internal sources was largely con- 
fined to periods of farm price inflation, and the prospects for farm 
prices in the early 1960's are not favorable. 



Supply of Capital 

Disregarding the question of the effectiveness of capital institutions, 
will enough capital be available for southern agriculture, U. S. agricul- 
ture, and particularly for the low-income group in agriculture? The 
answer to this question depends upon what our society elects to do about 
overcapacity in agriculture. At present, agriculture is characterized 
not only by the allocation of more human resources than is required, 
but also by the use of more land than is required to produce needed 
goods for consumption and export, and to make allowances for produc- 
tion fluctuations. To bring production and utilization into balance, be- 
tween 50 and 100 million acres of land may need to be retired from ag- 
ricultural production— the exact figure depending upon which acres are 
selected for retirement. 

Capital needs will depend upon the land retirement method used. 
This subject is also discussed by Coutu and Lindsey in Chapter 21. If 
land is retired by government purchase at 1960 market values, then a 
large portion of capital will be "released." If entire units are pur- 
chased, sellers are likely to transfer their labor services to the non- 
farm sector, and are almost as likely to use their liquid capital in the 
nonfarm sector. Even if some sellers reinvest in agriculture and con- 
tinue to operate a farm, farmers who sell to them are likely to trans- 
fer their labor and capital to nonfarm activities. Some sellers must 
transfer completely if the quantity of human resources employed in ag- 
riculture is to be reduced. Retirement of land by purchase might lead 
to a need for much additional capital in agriculture, i.e., more if low- 
income farmers form the capital, less if farmers who are better en- 
dowed with resources form the capital. The latter will be better able 
to form capital out of their own income. Some erstwhile farmers might 
reinvest in farm land and rent it to farm operators, thus providing capi- 
tal to agriculture. Unfortunately, in low -income areas, owning land 
solely for income is not a well-established practice and is not always 
profitable in comparison with alternative investments. Institutions for 
separation of ownership and management of resources are not well de- 
veloped for agricultural resources, particularly in the South. If the 
government rents land redundant to agriculture, this is not likely to add 
to agricultural capital unless rent receivers lend to farm operators as 
a rentier class. 

Strong production controls to reduce overproduction would probably 
have the effect of destroying some of the present value of agricultural 
capital. Funds for any additional capital formation would need to come 



CHANGES IN CAPITAL PRODUCTIVITY AND PROBLEMS 71 

from outside agriculture or from current farm incomes. How rapidly 
this capital formation would take place would depend to a great extent 
upon the farm price level that resulted from these stringent production 
controls . 

It is possible to argue that the market value of capital in agriculture 
is adequate for efficient production of the volume of farm products de- 
manded by society. If this happens to be the case, then the distribution 
among capital forms and among regions is not optimum. 



DATA ON PRODUCTIVITY OF PRIVATE CAPITAL 

Numerous data are available on resource use and productivity and 
on the relations between resources used and incomes. Unfortunately, 
neither the conceptualizations, the analytical tools, nor the interpreta- 
tions have been refined enough to give us complete confidence that we 
can measure input productivity precisely. 

Singh made a serious effort to introduce the level of management 
explicitly into an analysis of low incomes in a North Carolina county. 
For each technically feasible farm enterprise considered for the 
county, one to three levels of input -output relations were developed 
corresponding to one to three levels of management. Appropriate input - 
output relations were selected for each farmer, and his aggregate ca- 
pacity to manage was derived from his abilities on individual enter- 
prises. It was assumed that each farmer could make an optimum 
selection of enterprises and could obtain control over complementing 
resources available in the community and dispose profitably of owned 
resources not profitable for him to use. The results of these analyses 
show the optimum resource positions that could be reached by consider- 
ing only low levels of off -farm employment, and by considering two 
levels of additional investment capital (Table 4.2). 

In general, more capable managers tended to use more resources 
and to earn much larger incomes. The tendency of better managers to 
use more investment capital was distorted somewhat by enterprises on 
which nonfarm firms provided much of the capital. Farmer 6 went into 
commercial layers, with all of the additional capital coming from a feed 
dealer; other livestock enterprises often required little additional capi- 
tal from the farmer. 

Conversely, less capable managers tended to use fewer resources in 
any optimum combinations with their own human resources. For these 
farmers the marginal revenue productivity of additional investment 
capital was likely to fall more rapidly and to reach zero much sooner 
than for a manager assumed to be more capable. For one farmer who 
was a fair manager (the lowest category), making available unlimited 
land at the appropriate rent for his community and unlimited capital at 
5 percent would not raise his net farm income enough to get him out of 
the low-income category. One other assumption of the Singh study 
should be noted. Operating capital was not treated as a limiting factor; 



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CHANGES IN CAPITAL PRODUCTIVITY AND PROBLEMS 73 

it was assumed that the optimum volume required would always be 
available at 5 percent. This seemed reasonable in the county, but it 
does help account for some of the large increases in income. More 
will be said below about the productivity of operating capital. 

Dr. Earl O. Heady has been a pioneer in efforts to estimate re- 
source productivities and particularly to make interregional compari- 
sons of the productivity of capital, labor, and land. Some of the se- 
lected Heady and Shaw data seem to indicate a high level of marginal 
productivity of capital— considering either the direct measure or 
changes in the marginal revenue productivity of labor as more capital 
is used (Tables 4.3 and 4.4). Yet values computed from data in the 
study left serious questions. Is not the intercorrelation between the 
capital available and the quality of management a strong possibility? 
If this is the case, would not the apparently high marginal productivity 
of capital on Alabama farms be a joint return not only to more capital 
but to better management and more efficient labor? The magnitude of 
residual products that must be imputed seems to indicate that the vol- 
ume of conventional inputs falls far short of explaining total produc- 
tivity . 

Adding the original estimate of the value of labor and the residual 
product assigned to labor, and dividing the result by months of labor, 
yields interesting results. Is it not possible that high values of labor 
found on the farms with low volumes of labor and high volumes of capi- 
tal are really due to imputing the value of labor and management to this 
labor, while additional labor seldom adds any management but is truly 
only an increment of labor? Whatever management the well-run units 
with low volumes of labor have is likely to be adequate with labor 
added. 

Further reflections on the Heady -Shaw data cause doubt about what 
is being measured. In a discussion of problems encountered in study- 
ing resource productivity, Dr. Glenn L. Johnson stated: "Another dif- 
ficulty which may arise from the managerial process is the following: 
superior managers may operate on superior production functions with 
more resources than their less capable counterparts. Thus, manage- 
rial ability, the efficiency of the production function used, and the 
amount of resources employed may be highly intercorrelated. Such 
correlation makes it difficult to separate the productivity of resources 
from increases in gross income due to use of superior production func- 
tions or superior managerial ability." 9 

There is reason for concern about the degree of intercorrelation 
and magnitude of its effect on productivity estimates. Further doubt 
arises on extrapolations from a Cobb-Douglas function. The invariant 
exponents require that increasing or decreasing returns to scale be the 
rule throughout the full estimating range. Since conventional wisdom 



9 Glenn L. Johnson, "Problems in studying resource productivity and size of business 
arising from managerial processes," Resource Productivity, Returns to Scale, and Farm 
Size, Earl O. Heady, Glenn L. Johnson, and Lowell S. Hardin (eds.), Iowa State University 
Press, Ames, Iowa, 1956, p. 19. 









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76 LEE R. MARTIN 

runs in terms of large increments of capital required to generate sat- 
isfactory incomes for low -income farmers in the South, there may be 
some question as to the usefulness of estimates outside the range of 
data. 

A final doubt is also based on the usefulness of estimates by extrap- 
olation. If principal reliance for higher farm incomes in the South 
must be on farm enlargement, then there is need to know whether opti- 
mum enterprise combinations will change as more capital is added. 
Unless enterprise combinations change little, there is reason to believe 
that the proportional and absolute inputs of land, labor, and capital 
would change drastically. At least, this is what Singh found in his 
study. The Heady -Shaw data seem to be consistent with this view, i.e., 
in each area, going from low labor and capital to medium labor and 
capital to high labor and capital added little to the marginal productivity 
of labor, and the increases shown may have been due in part to the 
characteristics of the functional form. Average returns to labor (in- 
cluding the residual) declined quite sharply in each of the four areas 
going from low, to medium, to high labor and capital. 

In a recent study of the experience of families receiving loans 
through the Farmers Home Administration (FHA), Hendrix has pub- 
lished some most interesting results. 10 Assuming that productive capi- 
tal is land and buildings plus working capital, in the North the average 
borrower originally had $6,600 in productive capital, borrowed $3,200, 
and increased his income by $1,300 (69 percent) and his net worth by 
$4,753 (100 percent). In the West, starting productive capital of $16,300 
plus a loan of $4,100 led to an increase of $1,638 (63 percent) in net in- 
come and an increase of $5,570 (61 percent) in net worth. In the South, 
$6,500 in productive capital and a loan of $2,200 was associated with a 
gain of $540 (32 percent) in income and a gain of $2,100 (42 percent) in 
net worth. These data indicate that additional capital in association 
with the management ability of the particular borrowers was more pro- 
ductive in the North and West than in the South, even though the FHA 
attempts to assist borrowers in making management decisions. Com- 
parisons of white borrowers and nonwhite borrowers in the South indi- 
cate no essential differences between them in income -earning capaci- 
ties, holding working capital and off -farm employment constant. One 
might speculate that FHA budget limitations in relation to the number 
of potential borrowers in each region allowed more selectivity among 
nonwhite applicants in the South than among white applicants, and more 
selectivity among all applicants in the South than among all applicants 
in the North and West. Thus in the South, the average nonwhite bor- 
rower might be expected to be further above the average management 
ability of all nonwhite farmers than the average white borrower is 
above the average management ability of all white farmers. Similarly, 
the average borrower in the South is probably further above the average 



10 William E. Hendrix, Approaches to Income Improvement in Agriculture, USDA, ARS 
Prod. Res. Rpt. No. 33, Washington, D. C, Aug., 1959, pp. 6, 11, 14, and 22. 



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78 



LEE R. MARTIN 



Table 4.5. Estimated Average Improvement Expenditures and Increase in Net 
Income per Farm for 7-Year Improvement Programs for 56 Farms 



Item 


Georgia 


Indiana 


Kentucky 


Nebraska 


Total or 
average 


Number of cases 


13 


14 


18 
(Dollars) 


11 


56 


Improvement expenditures 
in 7 years 


34,948 


17,416 


14,792 


10,084 


19,207 


Net income at start of 
improvement program 


3,503 


4,453 


2,378 


2,016 


3,087 


Expected net income at end 
of improvement program 


6,231 


7,464 


4,789 


3,977 


5,633 


Increase in net income 


2,728 


3,011 


2,410 
(Percent) 


1,961 


2,546 


Relative increase in 
net income 


78 


68 


101 


97 


82 


Rate of annual return 

expected from improvements 


8 


17 


16 


19 


13 



Source: L. E. Kreider, Farmers' Needs for Intermediate-Term Credit, Farm Credit 
Administration, Bui. CR-6, Oct., 1954. 

management ability of all southern farmers than the average borrower 
in the North or West is above the average management ability of all 
northern or western farmers. 

The results of a study conducted by Kreider show much greater 
income productivity for "land improvement expenditures" in Nebraska, 
Indiana, and Kentucky than in Georgia (Table 4.5). Southern and Hendrix 
found that 53 percent of the 88,060 rural family heads in northeast 
Texas could be considered to have "human resource limitations" that 
would presumably influence their economic productivity. For 15,100 
full-time farm family heads, the estimate was 52 percent^) 11 

Three other studies suggest somewhat unexpected productivities for 
operating capital. An analysis by Heady and Swanson reported that, on 
Iowa farms, additions to operating capital in several forms would add 
to net incomes, and that farmers believed this to be the case. 12 Fore- 
man's study of owner -operated farms in the Georgia Piedmont also in- 
dicated that additional operating capital on these farms had more effect 
on incomes than any other step considered. 13 A report by Baker and 
Stoevener on the productivity of soil fertility outlays in two Illinois 



11 John H. Southern and W. E. Hendrix, Incomes of Rural Families in Northeast Texas, 
Tex. Agr. Exp. Sta. Bui. 940, Oct., 1959, pp. 28-29. 

12 Earl O. Heady and Earl R. Swanson, Resource Productivity in Iowa Farming, Iowa Agr. 
Exp. Res. Bui. 388, June, 1952, pp. 751, 756, and 767. 

13 W. J. Foreman, Resource Returns and Productivity Coefficients on Owner-Operated 
Farms in the Piedmont of Georgia, Ga. Agr. Exp. Sta. Tech. Bui. N.S. 9, Dec, 1956, 
pp. 29-38. 



DISCUSSION 79 

farm areas (one containing primarily livestock farms and the other 
comprised largely of crop farms) also indicated that larger outlays on 
fertilizer would be profitable. 14 

On small farms operated by less capable managers, capital short- 
ages will persist for a long time. The productivity of capital on large 
farms with capable managers will remain high, and this group is likely 
to form most of the private farm capital, whether from external or 
from internal sources. Farming areas specializing in surplus products 
are likely to encounter financing difficulties because of unfavorable 
price prospects and associated uncertainty. Areas combining inade- 
quate human capital formation with surplus products will have all the 
appearances of severe capital need, but more improvement in income 
can probably be achieved in the long run through greater investments 
in our young human resources and in the short run by the development 
of better institutions for human capital formation among adults. 

Discussion 

SYDNEY D. STANIFORTH * 

Martin very clearly indicates at the outset that his discussion is 
concerned with the income effects of capital on low -income farms. He 
concludes that a major part of the low income and low average produc- 
tivity is due not to a misallocation of capital as such between size 
groups and between regions, but to rather serious management limita- 
tions. This is something to which we might readily agree without ap- 
preciating its implications. These implications are developed very 
effectively and, as such, represent a generous contribution to our at- 
tack on these capital problems. 

The analysis of relative productivities of capital in different re- 
gions and in different size groups is penetrating and extremely valua- 
ble. The conclusions constitute the basis for a very important reori- 
entation of our approach to capital allocation problems. Martin 
concludes that, while most studies show the marginal productivity of 
capital to be high in the South or other low-income areas, more capital 
cannot be expected to raise incomes very much in these areas because 
high marginal productivities depend on a higher level of management 
than these farms now have. Consideration of this conclusion can save 
us from some serious mistakes. 

We can heartily agree that long-run investments designed to in- 
crease the level of management and economic responsiveness of farm 
people, thereby increasing the level of economic welfare, is very 



14 C. B. Baker and H. H. Stoevener, Livestock and the Productivity of Soil Fertility Out- 
lays, Farm Mgt. Rpt. No. 189, Univ. of 111., June 22, 1959. 

*Associate Professor of Agricultural Economics, University of Wisconsin. 



80 LEE R. MARTIN 

important, particularly in depressed areas of agriculture. Effective 
short -run methods are also to be sought. In this whole problem, how- 
ever, one should follow Martin's own warning not to extrapolate ex- 
pected high marginal productivities of capital beyond what we know to 
be forthcoming. Just because the marginal productivities of capital in- 
vested in the human factor look like they would be high in low -income 
areas, substantial amounts of capital might be invested there with rela- 
tively low response. 

The conclusion that the already larger and more efficient farms 
will form most of the new capital from both internal and external 
sources in the years ahead has important implications. It suggests a 
wider separation income -wise between what is considered the commer- 
cial producing sectors and the low -income, or unemployed, sectors. By 
implication at least, this suggests that we can no longer attempt to 
treat the adjustment problem as a single problem. The low -income 
and aggregate production problems must be treated separately, co- 
ordinating such treatments to assure consistency but recognizing the 
fact that there is no single solution. 



Chapter 5 



DALE E. HATHAWAY 

Michigan State University 



Trends in Credit 
and Capital 1 



HISTORICALLY, the conditions relating to the availability of credit 
to agriculture have been one of the major reasons for farmer dis- 
content. Prior to about 1940, farm credit problems were of major 
concern to policymakers, and there was a substantial amount of profes- 
sional interest in credit problems among agricultural economists. 
Since World War n the major interest of both groups has been concen- 
trated upon price and income policies, and too little attention has been 
given to the effects of credit upon the income of farmers. 



CREDIT AND CAPITAL FORMATION IN AGRICULTURE 

An individual farmer or the agricultural industry may acquire in- 
creased capital to combine with other resources through savings from 
income, grants and inheritances, windfalls, renting, or the use of credit. 
In addition, persons in agriculture may use credit to transfer the own- 
ership of existing assets from one individual to another within the in- 
dustry, or from an individual outside the industry to one within. With 
such transfers, no new capital is made available to the industry even 
though the amount of credit used may rise. 

The most comprehensive view of the long-time changes in the cap- 
ital structure of agriculture is contained in the work by Tostlebe, which 
was cited frequently in Chapter 2. His conclusions were: (1) that ex- 
ternal financing has played a relatively minor role in the financing of 
net capital growth in agriculture— a major exception appears to have 
been the decade 1910-20; and (2) since 1910 the capital growth in agri- 
culture has been much more heavily concentrated in machinery and 
motor vehicles and less in real estate and livestock (Chapter 2). 
Tostlebe predicted this trend would continue. Since the end of the pe- 
riod covered by his work was about 1950, it is apropos to attempt an 
approximation of the trends of the 1950-1960 decade to determine how 
they compare with the long-time trends of earlier periods. 

On the basis of present data, several generalizations of importance 



1 The author is indebted to James T. Bonnen and Glenn L. Johnson for their constructive 
criticisms and suggestions. 

81 



82 DALE E. HATHAWAY 

appear warranted. First, the rate of gross and net capital formation in 
agriculture was very high during the period 1945-54, with major in- 
creases in investment in both real estate and machinery. After 1954 
the growth in net investment slowed appreciably, with a sharp decline 
in machinery investment accompanied by a modest decline in real es- 
tate investment. During the five years, 1955-60, there appears to have 
been no net increase in capital invested in machinery and equipment in 
U. S. agriculture, and the data may prove to be slightly negative when 
the final revisions are made. Meanwhile, the investment in real estate, 
which has been underestimated in recent years, appears to have con- 
tinued at a relatively high rate when considered from a historical view- 
point. 2 

Perhaps the most notable feature of the postwar period has been the 
importance of external capital sources to the growth in investment. 
Whereas Tostlebe showed a long-term rise in the proportion of internal 
financing of capital in agriculture, this trend has reversed in the post- 
war period. Thus, in each successive five-year period since 1945, the 
portion of capital growth financed externally has risen. In 1959, ex- 
ternal financing as a proportion of capital growth in U. S. agriculture 
may have been at an alltime high. 

Thus, the availability of credit to agriculture and the terms under 
which it may be obtained have become much more important than has 
hitherto been assumed. As long as capital formation in agriculture was 
primarily financed internally, credit conditions in agriculture greatly 
affected income distribution in agriculture. However, if capital forma- 
tion has become dependent upon external financing, then the total pro- 
ductivity of the industry is related to the conditions under which it can 
obtain credit. Therefore, the area of concern is much greater than if 
credit were considered primarily as a means of transferring the own- 
ership of existing assets among various persons. 

Even though the transfer of ownership does nothing to create new 
capital in agriculture, its importance under certain conditions should 
not be overlooked. It has been suggested that capital gains in agricul- 
ture may tend to compensate farmers sufficiently for low returns to 
labor so that over a person's lifetime the accumulation of assets by a 
farmer may approach those of his nonfarm counterpart. However, cap- 
ital gains can be realized only through ownership of the asset involved. 
Therefore, the provisions of credit which enables farm families to gain 
ownership of these assets may have important effects upon the long- 
time well-being of these families in a period when the market value of 
these assets is appreciating significantly. 

In view of these facts, it can be argued that adequate credit for agri- 
culture is important because it is an increasingly important source of 
new capital, and it allows farm families to capture any capital gains that 
may accrue to the owners of agricultural resources. 



2 The current figures for investment in real estate include only buildings and do not in- 
clude investment in land improvement, drainage, permanent pastures, etc. Expenditures on 
such investments appear to have been very substantial since 1945. 



TRENDS IN CREDIT AND CAPITAL 83 

Farm Mortgage Credit 

Credit extended to agriculture tends to be classified in terms of the 
security offered rather than in terms of the purpose for which it is 
used. For instance, it is often assumed that farm mortgage debt is 
largely credit to transfer the ownership of real estate with little or no 
effect upon capital formation in agriculture. A closer examination of 
the available data suggests this is not true. Thus, in the quarter ending 
June 30, 1959, the purposes for which 21 major life insurance compa- 
nies granted loans showed that only one- third of the total amount bor- 
rowed was used for farm real estate purchases. 3 Twenty- nine percent 
was used to refinance existing mortgages, and 17 percent to pay off 
other existing debts. Eight percent was used for repairs and improve- 
ments to land and buildings, and 13 percent for other purposes. At most 
two- thirds of these loan funds can be identified as merely providing 
credit to transfer farm ownership, and the actual percentage used solely 
for this purpose may be considerably lower. 

About one-half of the farm mortgage loans granted by the Farmers 
Home Administration during the same period was used for real estate 
purchases and one-fourth to refinance existing mortgages. The remain- 
ing loans were used primarily for capital improvements. 

A mid- 1956 survey of farm loans by commercial banks showed that 
only 57 percent of the loans secured by real estate mortgages were used 
to buy land. This was well below an estimated 70 percent of mortgage 
loans used to buy land in a 1947 survey. 4 The sharp increase in the use 
of credit secured by farm mortgages to finance intermediate- term in- 
vestments is not surprising in view of certain conditions which will be 
discussed later. 

Keeping in mind that real estate credit advanced to farmers is re- 
lated to security and not necessarily to purpose, an examination of some 
of the aggregate trends in these figures is presented here. On January 
1, 1959, outstanding real estate debt amounted to an all time high of 
$11.3 billion. This was more than double the postwar low of $4.8 billion 
in 1946. As yet, however, the annual volume of mortgages recorded or 
loans made in a single year remains well below the 1920 peak. The in- 
crease in total debt outstanding despite a lower annual volume is, of 
course, due to the increased share of loans now coming from sources 
which generally make longer term loans. 

Virtually everyone is aware that the annual volume of farm mort- 
gage credit fluctuates rather violently depending on the level of pros- 
perity in agriculture. It is often presumed that the growth of federally 
sponsored credit agencies for agriculture has resulted in their replac- 
ing the conventional lending institutions — banks and insurance 



3 Farm Mortgage Lending Experience of Life Insurance Companies, the Federal Land 
Banks, and Farmers Home Administration, July through September 1959, USDA, ARS, 
Washington, D. C, Jan., 1960, pp. 43-116. 

4 "Loans to buy farm real estate," Farm Loans at Commercial Banks, Board of Gover- 
nors of the Federal Reserve System, p. 37. 



84 



DALE E. HATHAWAY 



companies — as sources of farm mortgage funds. This, however, has 
not been the case, except for emergency years of the Great Depression 
(Table 5.1). 

Table 5.1. Proportion of Total Farm Mortgage Loans Made or Recorded by 
Principal Lenders, United States, 1910-59 



Loans made 



Mortgages recorded 



Federal Commercial 

Federal Farm Farmers and 

Total (all Land Mortgage Joint-stock Home Insurance savings Individual and 

Date lenders) Banks Corp. land banks Administration companies banks miscellaneous 



1910 1,249,885 
1920 3,625,780 1.85 
1930 1,364,625 3.45 
1935 1,061,693 23.32 18.45 
4.71 



2.72 



1940 


772,462 


8.28 


1945 


1,054,430 


8.71 


1950 


1,655,895 


12.26 


1951 


1,770,248 


11.94 


1952 


1,777,619 


14.15 


1953 


1,853,627 


15.43 


1954 


1,885,499 


16.01 


1955 


2,401,864 


20.10 


1956 


2,387,627 


21.81 


1957 


2,253,977 


17.91 


1958 


2,432,612 


19.42 


1959 


2,814,278 


22.26 



.53 



'ercem 


t of total) 








8.43 


16.62 


74.95 




10.67 


18.29 


68.60 




12.73 


26.03 


57.40 




7.35 


16.62 


34.26 


5.12 


18.83 


28.46 


34.60 


1.64 


13.76 


29.66 


43.50 


2.75 


21.00 


28.48 


35.51 


2.72 


21.54 


25.90 


37.90 


2.94 


19.42 


27.22 


36.26 


1.94 


21.26 


26.11 


35.25 


1.42 


20.69 


26.52 


35.35 


.64 


21.05 


24.23 


33.99 


1.69 


20.37 


22.11 


34.01 


3.22 


17.19 


22.30 


39.38 


3.26 


16.02 


22.81 


38.49 


2.92 


15.97 


21.51 


37.34 



Source: Agricultural Finance Review, USDA, ARS, Washington, D. C, Sept., 1960, p. 120. 
*Less than 1 percent. 



Instead, the largest decline as a source of farm mortgage credit has 
been in the group classified as "individuals and miscellaneous'' lenders. 
Prior to 1920, the data indicate that this group of lenders supplied about 
two- thirds of the annual mortgage credit used by farmers. However, 
this lending group accounted for less than 40 percent of the annual vol- 
ume of mortgages recorded during the 1950-60 decade. 

Commercial banks are the second largest suppliers of annual mort- 
gage loans, accounting for approximately one-fourth of the volume of 
mortgages recorded. Except for the years of acute depression and bank 
distress in the 1930's, the commercial banks have provided a relatively 
stable proportion of the annual mortgage loans recorded— about 25 to 
30 percent. 

Insurance companies account for about one-fifth of the farm mort- 
gage loans recorded annually. Their proportion has shown a slight de- 
cline but in 1959 was still well above the proportion of total loans made 
prior to 1930. 

The federal agencies, or federally sponsored lending institutions, 
have played a major role in the farm mortgage credit picture since the 
1930's. From 1932 to 1934 the proportion of mortgages recorded by 



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86 DALE E. HATHAWAY 

the Federal Land Banks rose from 3 to 40 percent of the total. Follow- 
ing the depression crisis, the proportion of annual volume furnished by 
the Land Banks declined until near the end of World War II. In the next 
ten years, a period of steady increase in mortgage debt, the proportion 
of the total mortgage loans made by the Federal Land Banks more than 
doubled and in 1959 accounted for about one- fifth of the mortgage loans 
made annually. Murray also presents relevant data on mortgage loans 
in Chapter 11. 

The Farmers Home Administration inherited a mortgage loan pro- 
gram designed to serve a restricted group of farmers. Since the FHA 
must depend upon Congressional appropriations for funds, it has fur- 
nished a declining proportion of the total mortgage funds for agriculture 
since the beginning of World War II. In the 1950' s the FHA provided 
only about 2 to 3 percent of the mortgage funds loaned in a given year. 

However, since the length of mortgage loans varies widely among 
lenders, the total mortgage credit outstanding to farmers at any given 
time depends upon both annual loan volume and length of maturity. 
Thus, while banks accounted for 20 percent or more of the total volume 
of mortgage recorded annually in the early 1950's, they held only 13 
percent of the total mortgage debt outstanding in 1958 (Table 5.2). On 
the other hand, insurance companies, whose loans are for longer terms, 
accounted for an estimated one-fourth of the loans outstanding on the 
same date. The generally longer terms of the Land Banks also increase 
their relative importance as a source of funds. 

The shift toward lending institutions with longer term loans is illus- 
trated by a comparison of the percentage changes in the amount of mort- 
gage loans outstanding (Table 5.3). The life insurance companies and 
Land Banks have increased their mortgages outstanding since 1950 at 
about twice the rate of insured commercial banks, and at a considerably 
higher rate than individuals and miscellaneous lenders. 

The increase in farm mortgage credit has not been at the same rate 
in all regions of agriculture (Table 5.4). The Pacific and Mountain re- 
gions had a sharp rise in mortgage credit outstanding in the 1945-50 
period. The South and the Northeast had moderate expansions of mort- 
gage credit during this period, whereas the Lake States, Corn Belt, and 
Northern Plains regions had no change or decline. 

During the 1950-55 period, the rate of expansion in mortgage credit 
was highest in the Mountain and southern regions. The Lake States and 
Corn Belt regions underwent a slower expansion in mortgages outstand- 
ing. The expansion in mortgage credit was also at a more rapid rate in 
the Southeast, Delta, Mountain, Pacific, and Northern Plains regions 
during the 1955-59 period. 

Thus, in terms of rate of increase in mortgage credit over the pe- 
riod considered, the Mountain, Southeast, Delta, and Pacific regions 
have led. Moreover, in terms of absolute or dollar expansion in mort- 
gage loans outstanding, the Mountain and Pacific regions have ranked 
behind only the Corn Belt. Although the relative rate of expansion in 



TRENDS IN CREDIT AND CAPITAL 87 

Table 5. 3. Farm Mortgage Debt: Amount Outstanding, by Lenders, Selected Years, January 1, 
1940-55 and 1957-59, and Percentage Change, 1950-59 and 1958-59, United States 



Year 


Federal 

Land 
Banks a 


Federal Farm 

Mortgage 
Corporation - b 


Life 
Farmers Home insurance 
Administration companies 3 


Insured 

commercial 

banks 


Individuals 

and 

miscellaneous 


Total debt 








(Million dollars) 








1940 


2,010 


713 


32 984 


534 


2,313 


6,586 


1945 


1,210 


347 


195 938 


450 


1,801 


4,941 


1950 


906 


59 


193 1,172 


879 


2,370 


5,579 


1955 


1,267 


13 


287 2,052 


1,136 


3,534 


8,289 


1957 


1,722 





290 2,477 


1,311 


4,108 


9,908 


1958 


1,897 





340 2,579 


1,341 


4,350 


10,507 


1959 


2,065 





388 2,661 


1,443 


4,697 


11,254 


Percentage change d 








(Percent) 








1950-59 


127.9 


- 


100.7 127.0 


64.0 


98.2 


101.7 


1958-59 


8.9 


- 


14.2 4.6 


7.6 


7.3 


7.1 



Source: The Balance Sheet of Agriculture, Agr. Info. Bui. No. 214, ARS, USDA, Washington, D. C, 

Oct., 1959, p. 25. 
a Includes regular mortgages, purchase money mortgages, and sales contracts. 
b Loans were made for the Corporation by the Land Bank Commissioner. Authority to make new loans 

expired July 1, 1947. On June 30, 1955, loans of the Federal Farm Mortgage Corporation were sold to 

the 12 Federal Land Banks. 
c Data for 1940 include only tenant purchase loans and direct soil and water loans to individuals. 

Thereafter, data include also farm development, farm enlargement, and project liquidation loans; 

farm-housing loans beginning July 1950; building improvement loans beginning 1955. 
d Computed from unrounded data. 



the Delta and Southeast has been high, the absolute expansion of mort- 
gage credit has not been as large as in several other regions. 

The question arises regarding whether the bulk of mortgage credit 
available to a region comes from within or outside the region. It is 
assumed that credit from banks, individuals, and miscellaneous lenders 
largely represents credit from within the region; whereas mortgage 
credit from Land Banks, insurance companies, and the Farmers Home 
Administration largely represents credit obtained from sources outside 
the region. 

Using this rough measure, the proportion of mortgage credit that is 
financed within the region varies widely among regions (Table 5.5). In 
the Northeast, Lake States, Appalachian, and Pacific regions, indica- 
tions are that the bulk of the mortgage credit is furnished from within 
the region since it is held by banks, individuals, and miscellaneous 
lenders. On the other hand, in the Corn Belt, Delta, Mountain, and 
Southeast regions, one- half or more of the mortgage credit comes from 
external sources. Also, in the Northern and Southern Plains regions, 
over 60 percent of the mortgage credit comes from sources outside the 
region. 

In the Mountain and Pacific regions, there has been a rapid expan- 
sion in the mortgages held by life insurance companies. This source of 



88 DALE E. HATHAWAY 

Table 5.4. Percentage Increases in Farm 
Mortgage Debt, by Regions, 1945-59 

Region Percent increase 

Northeast 201.5 

Lake States 179.8 

Corn Belt 180.6 

Northern Plains 169.5 

Appalachian 267.4 

Southeast 338.3 

Delta States 302.6 

Southern Plains 230.2 

Mountain 396.6 

Pacific 332.9 



United States 227.8 

Source: The Balance Sheet of Agriculture, Agr. 
Info. Bui. No. 214, ARS, USDA, Washington, 
D. C, 1959, p. 36. 

credit seems to have been a major source of the growth in mortgage 
credit. Mortgages held by life insurance companies have also been a 
major source for the rapid rate of increase in mortgage debt in the 
Delta and Southeast. On the other hand, the Appalachian region, the 
Lake States, and the Northeast have had slower rates of increase in 
mortgage debt, and the amount of mortgage debt held by insurance com- 
panies and Land Banks is relatively lower. 

An appraisal of the Appalachian and Southeast regions — which are 
generally regarded as the areas where the capital- man ratio and farm 
incomes are low— indicates that these regions still depend rather 
heavily upon internal capital for the financing of real estate debt. Also, 
the proportion financed internally has risen since 1940. The land con- 
tract has not been used as extensively in these regions, nor has its use 
expanded as rapidly as in other areas. Part of the explanation may be 
that the size of the units being transferred is generally smaller and can 
be more easily financed by local sources. Another explanation might 
be that these two regions have had sufficient internal credit available 
from individuals and banks. This, however, would seem unlikely in 
view of the rapid reduction in the labor force in these two regions with 
the resulting need to combine existing farms. Rather, it would appear 
that these regions may suffer from a lack of internal capital and, in 
addition, have an agricultural structure that is not generally able to 
compete with other areas for major sources of outside capital and 
credit. 

At the other extreme are the Mountain and Pacific regions. These 
regions, in which the rate of mortgage credit expansion has been high 



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90 DALE E. HATHAWAY 

have apparently been very attractive to outside lenders. Thus, mort- 
gage credit in these regions has been expanded largely through loans 
from insurance companies, Land Banks, and the Farmers Home Ad- 
ministration. 

In examining the farm mortgage credit structure from another view- 
point, one notices shifts over time in the regional distribution of loans 
made by those institutions which operate in various areas of the nation. 
One of the more striking shifts is the distribution of Farmers Home Ad- 
ministration mortgage credit away from its traditional concentration in 
the South with a corresponding rise in the proportion of loans in the 
Mountain, Pacific, and Plains regions. As mentioned previously, life 
insurance companies are sharply increasing the proportion of total 
mortgage loans in the Mountain and Pacific regions. Similar but less 
striking trends are shown in the proportion of total Land Bank loans to 
different regions. 

There is another major source of credit to facilitate the transfer of 
farm real estate for which no estimates are available. This source is 
the purchase contract and other instruments by which the seller finances 
the purchase of farm real estate. Estimates by the USDA suggest that 
this source is of major importance in the transfer of land in some re- 
gions and that use of this method is growing. Such contracts were used 
to finance about 20 percent of all the land transfers in 1958. 5 This was 
about twice the figure for 1946. In the Lake States and Mountain regions, 
purchase contracts accounted for about 40 percent of the transfers, 
compared with about 18 percent in the Corn Belt. Such contracts are 
also used less frequently in the South. The rise in the use of such 
credit instruments may be due to the inability of purchasers to obtain 
conventional financing and to the fact that there are apparently tax ad- 
vantages to the seller. 

A source of real estate capital which is sometimes overlooked is the 
farm land owned by nonfarm persons and rented to farm operators. De- 
spite the sharp decline in tenancy since 1940, there has been little change 
in the proportion of farm land that is owned by nonfarm landlords. 6 In 
1940 the value of land owned by nonfarm landlords was 27 percent of the 
total, and in 1959 it was 23 percent of the total. The proportion of farm 
land owned by nonfarm landlords varies widely among regions. In the 
Corn Belt and Northern and Southern Plains regions, a much higher pro- 
portion of the farm land is owned by nonfarm landlords, while in the 
Northeast, Appalachian, and Southeast, the nonfarm landlords provide 
very little of this form of capital. The data cited indicate that the cap- 
ital and credit market still, in 1960, is not performing as well in meet- 
ing the needs of southern agriculture as it is in meeting the needs of 
most other regions. 



5 Agricultural Finance Review, USDA, ARS, July, 1959, p. 24. 

6 Balance Sheet of Agriculture, Agr. Info. Bui. 214, USDA, ARS, 1959, p. 10. 



TRENDS IN CREDIT AND CAPITAL 



91 



Nonreal Estate Credit to Agriculture 



The growth in the use of nonreal estate credit by the farm economy 
has been as rapid as the growth in real estate credit. Since 1940 there 
has been an approximate fourfold increase in the amount of such credit 
held by the principal lending institutions (Table 5.6). 



Table 5.6. 



Nonreal Estate Loans to Farmers: Proportion Held by Principal Lending Institutions, 
United States, January 1 -Selected Years 1915-60 





Total 


All 


Production 


Federal 


Farmers Home Administration 








Emergency 




(excluding 


operating 


Credit 


Intermediate 


Operating 


Emergency 


capital 


Date 


CCC) 


banks 


Association 


Banks 


loans 


loans 


and feed 










(Percent of total) 






1915 


1,605,958 














1920 


3,455,253 














1925 


2,713,162 














1930 


2,546,104 














1935 


947,345 


66.28 


6.38 


5.81 


.59 


9.19 


11.74 


1940 


1,503,820 


59.85 


10.20 


2.15 


16.11 


.53 


11.16 


1945 


1,619,521 


58.59 


11.63 


1.84 


18.58 


.84 


8.53 


1950 


2,833,769 


72.30 


13.67 


1.79 


9.27 


* 


2.51 


1951 


3,366,254 


74.98 


13.39 


1.84 


7.53 


.67 


1.58 


1952 


4,063,463 


76.79 


13.82 


1.92 


6.05 


* 


.94 


1953 


4,214,996 


75.80 


14.22 


1.97 


6.67 


.68 


.66 


1954 


3,743,543 


73.80 


14.47 


1.70 


8.14 


1.36 


.53 


1955 


3,986,328 


73.60 


14.47 


1.46 


8.29 


1.77 


* 


1956 


4,420,483 


74.84 


14.58 


1.40 


7.23 


1.65 


* 


1957 


4,469,888 


73.38 


15.64 


1.34 


7.56 


1.83 


* 


1958 


4,993,983 


72.19 


17.74 


1.35 


6.97 


1.59 


* 


1959 


5,764,702 


72.18 


19.34 


1.45 


5.89 


1.04 


* 


1960 


6,661,178 


72.27 


20.43 


1.34 


5.19 


.71 


.06 



Source: Computed from data in Agricultural Finance Review, op. cit. 
*Less than 1 percent. 



141. 



Perhaps the most striking feature of the nonreal estate credit is the 
dominance of commercial banks as sources of these funds. At the close 
of World War n, commercial banks accounted for about 60 percent of 
the loans held by the principal lending institutions. By 1949 this per- 
centage had increased to about 70, and since that time, the percentage 
has remained relatively stable. 

The postwar period has seen a relative decline in the proportion of 
nonreal estate credit supplied by the Farmers Home Administration. 
At the end of World War II, the FHA programs provided about one- 
fourth of this type of credit used by agriculture. By 1959 this percent- 
age was down to about 7 percent. 

The Production Credit Associations have shown a rapid expansion 
in the proportion of the total nonreal estate loans held by principal 
lenders. On January 1, 1959, they held almost 20 percent of this type 
of credit outstanding, which was about double their percentage of 1945. 

As in the case of real estate credit, wide differences are found 



92 DALE E. HATHAWAY 

among regions in the relative importance of the major institutional 
sources of nonreal estate credit (Table 5.7). In the Corn Belt, the Lake 

Table 5.7. Proportion of Nonreal Estate Loans to Farmers Held by 
Different Lending Institutions in Mid- 1958 







Percentage of loans held by 






All 








commercial 


Farmers Home 


Production 


Region 


banks 


Administration 


Credit Assoc. 


Northeast 


65.4 


10.2 


24.3 


Corn Belt 


77.1 


4.8 


18.0 


Lake States 


77.2 


7.2 


15.6 


Appalachian States 


62.0 


8.9 


29.1 


Southeast 


54.1 


11.7 


34.3 


Delta States 


48.0 


13.9 


38.1 


Southern Plains 


64.6 


16.4 


19.0 


Northern Plains 


80.7 


8.4 


10.9 


Mountain States 


68.3 


10.0 


21.7 


Pacific States 


79.7 


4.1 


16.1 



Source: Computed from tables in Agricultural Finance Review, July, 1959. 

States, the Northern Plains, and the Pacific regions, three-fourths or 
more of this credit is furnished by commercial banks. In the Mountain, 
Southern Plains, Appalachian, and Northeast regions, about two- thirds 
of the nonreal estate credit is furnished by banks. In the Southeast and 
Delta regions, commercial banks furnish only about one- half of the non- 
real estate credit used by farmers. 

In general, the southern regions appear to depend more heavily upon 
the FHA and PCA's as sources of short-term credit than do other re- 
gions of the nation. Moreover, while the banks have increased their 
proportion nationally from 59 percent in 1940 to 72 percent in 1958, in 
the southern regions the commercial banks apparently have provided a 
stable or declining portion of these short-term loans. This suggests 
that financing from within the region has not been readily available to 
farmers on terms that were as favorable as those terms available from 
other lenders. 

The discussion of nonreal estate credit only in terms of the major 
lending institutions leaves one somewhat uneasy. Since 1940, new sources 
of short-term credit for agriculture have expanded rapidly and we know 
very little about them. The two sources that are, as yet, largely un- 
measured are: (1) dealer credit supplied by the seller of inputs, and 
(2) credit that may be supplied to farmers who participate in a vertically 
integrated organization. In many cases the latter may be a form of 



TRENDS IN CREDIT AND CAPITAL 93 

dealer credit, but the fact that more than the extension of credit is in- 
volved would appear to warrant placing it in a separate class. 

Too little is known about either the extent or terms under which 
these sources of credit are available to farmers. Indications are that 
the costs of dealer credit are much higher than the costs of nonreal 
estate credit from the conventional lending institutions. The question 
arises regarding why farmers appear to be making increased use of 
such credit. 

Numerous factors appear to be involved in the spreading of "verti- 
cal integration. " The addition of product price stability, guaranteed 
markets, technical production advice, and many other issues may be as 
important as the cost and availability of credit to the producer. 

In some cases, both dealer credit and vertical integration may tap 
a source of credit which has generally been unavailable to farmers. 
Such credit is sometimes furnished by an organization which has access 
to equity capital markets, often outside the region and outside the farm 
economy. Thus, integration by a national feed company or a large re- 
tail chain may mean that capital is made available to farmers under 
more satisfactory conditions than would otherwise be possible. This 
subject is discussed in greater detail in Chapter 8. 

Nonreal estate credit is often used to finance new investments in 
land and buildings. Merchant credit has been used to improve milk 
houses, build facilities to produce broilers, and in some cases, to build 
barns. Many of the operating loans of FHA and many of the bank loans 
not secured by real estate are used for such purposes. 

There are several indications that the growth of dealer credit in 
various forms may be due to the failure of the existing institutional 
structure to provide adequate credit to farmers for intermediate- term 
capital. An indication of this may be the aforementioned increase in 
the use of mortgage credit as a method of financing increases in non- 
real estate capital. One reason for the increased use of real estate 
mortgage credit to finance short-term capital is the lower cost and 
more favorable terms. Another indication is the rise in the use of 
dealer credit which generally is much more expensive than credit from 
conventional lending institutions. Even though the credit costs more, 
the length of the loan offered by dealers and merchants may be more 
realistic in terms of the use of the capital than is the length of the loan 
offered by the average commercial bank. In mid- 1956 banks charged 
an average interest rate of 8.3 percent on notes acquired from dealers 
as compared with an average rate of 6.2 percent for direct loans for 
these purposes. 7 However, almost two- thirds of the acquired notes had 
maturities longer than one year, whereas only slightly more than a 
fourth of the direct loans were written with maturities longer than a 
year. 8 

It is apparent that commercial banks may have policies regarding 



"Loans to buy farm real estate," op. cit., p. 27. 
Ibid., p. 24. 



94 DALE E. HATHAWAY 

credit for the purchase of intermediate- term capital items which are no 
longer realistic in terms of the size of such investments and their earn- 
ing power. The result seems to have been a rapid growth in the use of 
credit furnished by PCA's, dealers, and other sources which will pro- 
vide credit with longer maturities than is usually true of commercial 
banks. 



CREDIT AND SOCIAL CAPITAL FOR AGRICULTURE 

Most discussions of the capital and credit structure of agriculture 
concentrate upon the provision of credit and the accumulation of capital 
upon individual farm units. However, it is generally agreed that the 
productivity of individual units is related to the general development of 
the area in which they are located and that the productivity of an area 
is partially related to the overhead or community capital available to 
the community. Among the items that might be included as community 
capital are schools, hospitals, power generation and transmission facil- 
ities, irrigation and flood control facilities, and transportation facilities 
(cf. Chapters 3, 4, 22, and 23). 

Probably the adequacy of private sources of credit to meet the needs 
of agriculture for community capital can best be assessed by examining 
the extensive role that government has had to play in the development of 
such capital. One of the sponsors of this symposium, the Tennessee 
Valley Authority, represents one of the largest and most comprehensive 
investments of public capital for such purposes in the history of our na- 
tion. That investment in such capital pays in this region is no longer 
questioned. However, the very fact that only public sources were will- 
ing to provide this capital suggests that agriculture in general, and 
particularly in certain regions, finds that little private credit is avail- 
able for the development of community capital. 

Even the more prosperous agricultural regions had difficulty in ob- 
taining electric power until the Rural Electrification Administration 
made public credit available. The policy decision was made early that 
the financing of roads could not depend entirely upon the ability of a re- 
gion to attract private capital. 

Apparently the farm economy has experienced difficulty in obtaining 
private credit to finance modest- scale irrigation programs. The suc- 
cess of the Farm Security Administration and the Farmers Home Ad- 
ministration with the water facilities loan program suggests that such 
loans are feasible and sound, yet apparently, few attracted private 
credit until the advent of the insured loan program. 

The author lacks knowledge of data regarding the relative cost and 
availability of credit to finance hospitals and schools in rural and urban 
areas. It would not be surprising, however, to find that the cost of such 
credit was higher for rural areas. 

If private credit available to agriculture for the financing of commu- 
nity capital is restricted or the terms are especially unfavorable, we 



TRENDS IN CREDIT AND CAPITAL 95 

can expect continued political pressure for the provision of public funds 
to provide community capital. It is important to our total economy that 
agriculture be supplied with an adequate amount of community capital 
on favorable terms, even if it must be supplied by public sources. The 
rate at which the extreme poverty in agriculture is reduced depends in 
part upon the ability of the low- income regions to attract community 
capital to combine with the human resources in these regions. Further 
discussion of the role of capital and credit in rehabilitating low- income 
rural areas may be found in Chapters 14, 22, and 23. 



AGRICULTURAL CREDIT AND THE GENERAL ECONOMY 

Implicit throughout this discussion has been the assumption that 
agriculture has become more dependent upon external credit as a source 
of capital and that this dependence will continue and increase. This as- 
sumption is based upon the structural changes in the agricultural indus- 
try which have taken place since 1940, and which are still under way. 
If the assumption is true, what does it mean for agriculture? 

If agriculture is going to require increased credit from the non- 
agricultural economy, it means, among other things, that the credit 
structure serving agriculture may need substantial revisions. The com- 
mercial credit sector of the economy has substantially altered its 
structure in recent years to serve the new demands for consumer credit 
to finance the purchase of consumer durables. It now appears possible 
for persons to buy autos and televisions on credit with a longer matu- 
rity than the typical farmer can obtain to purchase a new tractor or 
combine. As yet, no widespread revision appears to be under way in 
the credit practices to finance intermediate- term agricultural invest- 
ments. Murray, Diesslin, and others appraise the adequacy of the credit 
market and credit institutions serving American agriculture, and ad- 
justments to our present credit system are suggested in Part III. 

The need for increased external credit also means that agriculture 
will be increasingly subject to the effects of general monetary policy 
upon the availability and cost of credit. Even the cost of credit for 
government borrowing can change sharply within a short time. We know 
very little about the impact of general monetary and credit conditions 
upon agriculture, but there are indications that the "tight money" situa- 
tion has affected both the availability and cost of agricultural credit 
(cf. Shepardson's discussion in Chapter 18). 

It is not necessarily wrong for the agricultural industry to be sub- 
ject to general monetary policy. On the other hand, since agriculture 
sometimes has moved almost countercyclically during two successive 
business cycles, there is little justification for the application of gen- 
eral monetary policy to agriculture in order to influence the direction 
of general business activity. 

The likelihood of increased reliance upon external credit as a source 
of capital for agriculture in the decade 1960-70 should mean an 



96 DALE E. HATHAWAY 

increasing interest by farm leaders, policy makers, and financial insti- 
tutions serving agriculture in monetary policy and the provision of ade- 
quate credit to the agricultural economy. Much more information re- 
garding capital and credit in the farm economy will be required for these 
groups to develop wise private and public policies. 



NEEDED STATISTICS AND RESEARCH 

Perhaps the greatest need is better statistics relating to agricul- 
tural capital and credit used by U. S. agriculture. Those who are re- 
sponsible for such statistics have extended their estimates heroically 
beyond their basic data, which unfortunately excludes data on some of 
the important sources of agricultural credit. Thus, we find the esti- 
mates on merchant and dealer credit "based on fragmentary data." 9 As 
yet, an accurate and comprehensive picture of the total farm debt and 
farm credit structure has never been deemed important enough to war- 
rant inclusion in the Census of Agriculture, which is somewhat striking 
in view of the detailed information provided on certain other aspects of 
agriculture. 

It is likely that there have been relatively few research analyses of 
aggregate credit statistics on either a national or regional basis because 
of the paucity of relevant data. Nothing has been done to determine the 
national or regional supply and demand for credit in agriculture. Nor 
do we have any research regarding the impact of changes in general 
monetary policy upon the supply or price of credit to the farm economy. 

Probably the greatest gap of all, in both research and statistics, re- 
lates to the growth of community capital and its adequacy in the farm 
economy. So little is known here that it is difficult to assess the role of 
credit in providing this capital and impossible to make informed judg- 
ments regarding what this role might be or should be. 

Increased interest has been shown in research on the productivity 
of capital on individual farms and the availability of credit to provide 
such capital. As yet, this research does not appear to have been ex- 
tended to investigations of the kinds of institutional changes necessary 
to meet the needs of agriculture. Admittedly, research on institutions 
tends to involve values and does not allow the researcher the comfort of 
statistical neutrality, but it has been useful in the past and will probably 
be so in the future. Tolley presents a more comprehensive discussion 
of needed research on capital and credit in Chapter 27. 



9 Balance Sheet of Agriculture, op. cit., p. 2. 



Discussion. 



BISHOP* 



Although Hathaway' s presentation contains a great deal of informa- 
tion relative to the changes that have been taking place in capital mar- 
kets for U. S. agriculture, a number of the details presented are ques- 
tioned. 

Hathaway states that "as long as capital formation in agriculture 
was largely financed internally, credit conditions in agriculture largely 
affected income distribution in agriculture. " Also, he states that "as 
capital formation has become more dependent upon external financing, 
the total productivity of the industry is related to the conditions under 
which it can obtain credit." Whether the credit conditions affected only 
income distribution depends upon the adequacy of credit for agricultural 
growth and development. Even though internal financing may have con- 
stituted the major source of capital in agriculture, the fact that credit 
was not obtained from outside sources may have impeded the general 
development of agriculture. What his statement really means is that 
the opportunity for any individual to acquire additional assets depends 
upon his ability to rent, to save, or to acquire credit. Whether this 
credit comes from within agriculture or from the outside is largely ir- 
relevant except in the context of capital rationing to agriculture. 

Hathaway argues that adequate credit for agriculture is important 
because it allows farm families to realize any capital gains that may 
accrue to the owners of agricultural resources. I tend to share this 
bias, but I do not believe that this is an adequate criterion for making 
credit available to agriculture. If this position is carried to a logical 
conclusion, it would mean that no nonfarm families would be permitted 
to own farm resources. 

Our attention is called to the fact that the "annual volume of farm 
mortgage credit fluctuates rather violently depending on the level of 
prosperity in agriculture. When agricultural conditions are relatively 
prosperous, the need for external financing usually declines and the 
annual volume of mortgage credit declines. * This observation is not 
consistent with the data presented in Table 5.2. There was a consistent 
increase in farm mortgage debt from 1910 to 1924, and a decrease 
thereafter until 1946. Then again there was a consistent increase from 
1946 through 1958. I doubt seriously that these periods of change in 
farm mortgage debt are highly correlated with the relative prosperity 
of agriculture. One might raise the question concerning what should be 
expected as a logical relation of farm mortgage credit (debt) and move- 
ments in farm and nonfarm incomes. Until a logical relation has been 
"spelled out," it is difficult to appraise observed behavior. 



♦Head, Department of Agricultural Economics, North Carolina State College. 

97 



98 DALE E. HATHAWAY 

In Chapter 5 sources of credit were divided into those available to 
the region from within and outside the region. According to Hathaway's 
analysis, the Southeast appears to "have an agricultural structure that 
is not generally able to compete with other regions for major sources 
of outside capital and credit," although it seems to be able to attract 
outside nonreal estate capital. Much more information is needed rela- 
tive to the earnings of capital in various parts of American agriculture 
before conclusions can be reached relative to the operation of the cap- 
ital market. It would seem appropriate to draw some attention to a 
comparison of interest rates among regions and to examine the transfer 
of resources within agriculture. At one time the pattern of migration 
within agriculture indicated a substantial flow of farm people from the 
Midwest into the Southeast, while very few people were moving in the 
opposite direction. This pattern certainly is not consistent with a low 
productivity of capital in southeastern agriculture. 

Although Chapter 5 was directed primarily to the supply side, this 
reviewer feels that many of the generalizations made with regard to the 
use of credit may well be charged to the demand side. Hathaway argues 
that the low- income regions in agriculture still have difficulty in attract- 
ing external credit to provide capital. It is quite conceivable, however, 
that to a large extent this may be the result of risk aversion and inabil- 
ity to perceive adjustment opportunities, rather than capital rationing. 

In his discussion of agricultural credit and the general economy, 
Hathaway completely disregards consideration of the optimum amount 
of credit; the question of whether too much credit has been made avail- 
able to agriculture is not considered. Consideration should have been 
given to the aggregate effects of increasing the supply of credit. 

The most disappointing section of Chapter 5 dealt with "Needed Sta- 
tistics and Research." In this section Hathaway admonishes us to get 
more answers by getting better statistics related to agricultural capital 
and credit used by U. S. agriculture. This reviewer would like to sug- 
gest that before we launch a full-scale effort to get more answers, we 
need a better understanding and agreement concerning what the major 
credit problems facing agriculture really are. Only after this has been 
done will we be in position to bring our research resources to bear on 
these problems and find solutions to them. 

GLENN E. HEITZ * 

The capital and credit problems in agriculture as referred to by 
Hathaway present a rather cheerless picture of agriculture. The im- 
pression is left that all farmers are pretty much the same, and that they 
are typified by low incomes, difficulty in making financial progress, and 
inadequate credit. I find it difficult to accept such a generalized concept 
of agriculture. While most farmers may have been in this group in 1940 
or before, this is no longer true. Agriculture has changed rapidly. The 



'Director, Cooperative Bank Service, Farm Credit Administration. 



DISCUSSION 99 

agriculture which existed in the past has been replaced by several 
rather distinct groups of farmers who have differing capital and credit 
needs. 

In dealing with capital and credit problems in agriculture, I think we 
can distinguish among at least six rather broad groups or categories. 
One of these groups includes the full-time commercial farmers. In gen- 
eral, farmers in this group have made good financial progress over a 
period of years. Large amounts of credit are borrowed and repaid by 
commercial farmers. These farmers produce the greater part of the 
farm output. 

A second important group in agriculture includes the part-time 
farmers. They have dual sources of both income and credit. They use 
off-farm income and farm income to supplement each other. 

A third category of agriculture which is increasing in importance 
and which is distinct from other segments of agriculture is timber 
farming. Capital and credit needs in this field are highly specialized and 
require long-term funds. 

A fourth group in agriculture whose numbers are increasing rapidly 
are the rural residents. While rural residents have credit needs for 
consumption purposes, they do not have capital needs for purposes of 
production. Therefore, they can hardly be classed as part of agriculture 
in this discussion. 

A fifth category that usually is included in agriculture when the term 
is used loosely consists of the numerous tracts of waste and abandoned 
land. Such land does not contribute to farm output. 

The sixth important group, which rounds out what most of us have 
in mind when we speak of agriculture, includes the marginal and under- 
sized farms. Such farms are rather numerous, but they account for 
only a limited portion of the farm output. This is probably the segment 
of agriculture to which Hathaway refers when he points to the inade- 
quacy of capital in agriculture and the difficulty in acquiring capital. I 
am in full agreement that farmers on marginal units should be given all 
reasonable assistance that will contribute to improvement of their posi- 
tion. The cooperative Farm Credit Banks and Associations make many 
loans to farmers in this category to assist in improving, adjusting, and 
enlarging farm units. Loans of this type also are being made by other 
lenders, such as commercial banks. Many farmers who cannot meet 
the financial requirements of conventional lenders and who need more 
supervision and guidance also are being served with loans from the 
Farmers Home Administration. Problems faced by farmers in this 
group, however, often lie outside the credit field. 

Hathaway refers to the difficulties farmers face in getting control of 
capital. While difficulties do exist in individual cases, agriculture as a 
whole has done a fairly good job in assembling the necessary capital 
and assets. Available data indicate that on the average $20,650 is in- 
vested per worker in agriculture as compared with $20,400 per worker 
in industry. Farmers also have a favorable ratio of equity to debt. 



100 DALE E. HATHAWAY 

Cooperatives having a net worth of $3.8 billion are owned and controlled 
by farmers. 

The "tight money" situation referred to by Hathaway has certainly 
affected the cost of funds, but cooperative Farm Credit Banks and As- 
sociations have not lessened the availability of funds through their or- 
ganizations during this period. 

Frequently we hear that agricultural lenders are not meeting their 
full responsibility to farmers. It is sometimes said that lending pro- 
grams tend to lag and are not progressive. Lenders are partly respon- 
sible that such impressions exist, since lenders probably have been 
spending too much time doing their job and not enough time telling about 
their accomplishments. The Production Credit Associations are active 
in making intermediate- term loans to farmers to finance purchases or 
adjustments requiring payments of 3 to 5 years. About 30 percent of 
the loans made by the Federal Land Banks is used to finance purchases 
of equipment and to assist in farm improvements, while 25 percent of 
such loans is used to purchase farm real estate and 45 percent goes 
into refinancing and consolidating existing debts. During 1959 the banks 
for cooperatives advanced almost $700 million to help finance the mar- 
keting and purchasing activities of farmers' cooperatives. Even in the 
Southeast, which traditionally is considered a capital deficit area, 
lenders are doing much to aid farmers in making needed adjustments. 
A study of Land Bank and Production Credit Association financing for 
the period 1950-54 showed that 45 percent of all farmers in the South- 
east were making needed shifts and adjustments. Of those making such 
adjustments, 76 percent were doing it by using credit. 

There are limits to the amount of risk lenders can assume. Vary- 
ing degrees of risk or loss exist in most loans made by agricultural 
lenders. It is expected that losses will occur on some loans and that 
these losses will be offset by favorable experience on other loans. But 
as lending is expanded to include more and more of the marginal farms 
where risks are greater and losses are larger, the lender is faced with 
the question of whether borrowers with sound, productive farming oper- 
ations should in effect be asked to carry the risks of marginal borrowers. 
Another question is: How much risk can be taken and how much loss can 
be absorbed within the concept of lending at reasonable rates of interest? 



PART II 

Changing Capital Structure 
in Agriculture 

► Effects of Technology 

► Factor and Product Price Changes 

► Vertical Integration 

► Role of Farm Family 

► Regional Agricultural Adjustments 



Chapter 6 

WILLIAM H. SCOFIELD 

GLEN T. BARTON 

Agricultural Research 
Service. USDA 



Technology and Changes 
in Capital Structure 



THE STRUCTURE of U. S. agriculture has changed greatly since 
1940. An important feature of this structural transformation has 
been the change in kind and quantity of capital used in farming. 
The main purpose of this chapter is to trace the major changes in 
aggregate use of capital in agriculture since 1940, and to relate these 
changes to changing technology and economic forces. These develop- 
ments and relationships for agriculture as a whole will be appraised, 
and important variations for southeastern agriculture to the extent 
permitted by available data will be noted. 

Attention is focused on the assets of agriculture that contribute di- 
rectly to farm output. Thus, the value of operators * dwellings and 
household furnishings, the value of automobiles chargeable to family 
living, and certain farmer financial assets that are logically included 
in a balance sheet, are excluded. Productive assets are valued in both 
1959 and 1947-49 prices to exclude the effects of price changes, and 
thus permit comparisons with various measures of annual input and 
output that are arrived at similarly. 



MAJOR STRUCTURAL CHANGES AND ECONOMIC FORCES 
AFFECTING USE OF CAPITAL 

Two important and interrelated aspects of structural change have 
had a dominant influence on changes in aggregate kinds and quantities 
of capital used. These are (1) the substitution of nonfarm inputs for 
both farm labor and farm land and (2) the marked decrease in number 
and increase in size of farms. 

Two major economic forces are also basic to an understanding of 
the changes that have occurred in aggregate kinds and quantities of 
capital used in agriculture. The rising price of labor relative to other 
inputs, together with the general availability of nonfarm employment 
opportunities, has influenced greatly the composition of agricultural 
inputs and the use of capital in farming. 

Also, throughout most of the years between 1940 and 1959, farmers 
had strong economic incentives to adopt improved production practices 
and lower unit costs of production. These incentives prevailed primarily 

103 



104 WILLIAM H. SCOFIELD AND GLEN T. BARTON 

because of a continuing reserve of unused technology and favorable 
price relationships. In the immediate postwar years, cash reserves 
that were accumulated during World War II were used to replace obso- 
lete and inefficient machines and equipment New items of equipment 
flowed from laboratories and assembly lines of the industries that sup- 
ply agriculture with its working tools. In the late forties, price rela- 
tionships were especially favorable for adoption of the new techniques, 
but commercial farmers continued to feel the pressure to further im- 
prove their physical plant when prices of farm products declined. 
Thousands faced the choice of keeping pace with the technological rev- 
olution or withdrawing from farming. 



CHANGES IN AGGREGATE USE OF CAPITAL 

The value of productive assets used in farming has increased sub- 
stantially since 1940. Dollar value of assets by January 1, 1959, totaled 
$155 billion — four times the value on January 1, 1940. The value of 
total productive assets showed a fairly steady growth throughout the 
period (Table 6.1). Farm real estate dominated the capital picture, 
accounting for 65 percent or more of the value of all assets during 
each of the periods. 

Only the value of farm machines and motor vehicles rose more 
percentagewise than did the value of real estate during the two decades. 
Investment in machines and motor vehicles accounted for 10 percent of 
the value of all productive assets in 1959, compared with less than 7 
percent in 1940-42. The impact of increasing mechanization on the 
capital structure of agriculture is further emphasized if changes in the 
composition of livestock inventories are considered. Horses and mules 
made up a fourth of the value of livestock on farms in 1940, but ac- 
counted for less than 2 percent of the inventory value in 1959. 

Price changes accounted for more than 80 percent of the rise in 
value of all productive assets used in agriculture from 1940 to 1959. 
Changes in price were responsible for almost 90 percent of the in- 
crease in value of farm real estate during the period. When productive 
assets are revalued at 1947-49 prices, an increase of only 25 percent 
between 1940 and 1959 is indicated (Table 6.2). Farm real estate dom- 
inates the capital picture on this basis also, but the percentage in- 
crease in the two decades was exceeded by the increase in value of all 
other capital groups shown except livestock. 

Although present estimates show a relatively small increase in the 
constant-dollar value of land and service buildings, the dominant posi- 
tion of real estate in the total capital picture warrants further atten- 
tion. A part of the increase in the value of land (1947-49 dollars) be- 
tween 1940 and 1954 is attributable to the 97-million-acre increase in 
land counted as "in farms" by the agricultural censuses. This increase 
in acreage has added about $4.5 billion (1947-49 dollars), and net in- 
vestment in service buildings an additional $4 billion to the volume of 



TECHNOLOGY AND CHANGES IN CAPITAL STRUCTURE 105 

Table 6. 1. Productive Assets Used in Agriculture, in Current Prices, 
United States, Specified Periods, 1940-59 



Period 


Farm 

real 

estate a 


Livestock 


Machinery 
and motor 
vehicles 15 


Feed 

crops 

inventory 


Working 
capital c 


Total, 

excluding 

real 

estate 


Total 








(billion dollars) 








1940-42 


29.3 


5.8 


2.8 


2.2 


1.5 


12.3 


41.6 


1944-46 


46.0 


9.5 


4.9 


4.6 


2.8 


21.8 


67.8 


1947-49 


61.9 


13.2 


6.2 


5.9 


3.9 


29.2 


91.1 


1950-52 


73.3 


16.5 


11.4 


5.9 


4.5 


38.3 


111.6 


1953-55 


83.0 


12.6 


13.8 


6.0 


4.7 


37.1 


120.1 


1956-58 


95.5 


12.0 


14.6 


5.5 


4.6 


36.7 


132.2 


1959 


110.8 


18.1 


15.7 

Compositic 


5.9 
n of assets 


4.9 


44.6 


155.4 








(percent) 








1940-42 


70.4 


14.0 


6.7 


5.3 


3.6 


29.6 


100.0 


1944-46 


67.9 


14.0 


7.3 


6.7 


4.1 


32.1 


100.0 


1947-49 


67.9 


14.5 


6.8 


6.5 


4.3 


32.1 


100.0 


1950-52 


65.7 


14.8 


10.2 


5.3 


4.0 


34.3 


100.0 


1953-55 


69.1 


10.5 


11.5 


5.0 


3.9 


30.9 


100.0 


1956-58 


72.2 


9.1 


11.0 


4.2 


3.5 


27.8 


100.0 


1959 


71.3 


11.6 


10.1 


3.8 


3.2 


28.7 


100.0 



a Excludes value of dwellings. 

Excludes 60 percent of value of automobiles. 
C A portion of total demand deposits held by farmers derived by adjusting the deposits 

of January 1, 1942, by an index of production costs. 

real estate since 1940. These two items together account for the in- 
crease of 15 percent since 1940 in the constant -dollar value of land and 
service buildings. 

A sizable but unmeasured net increase in the productive value of 
land resulted from expenditures for irrigation, drainage, clearing, and 
other land improvements that contribute to farm output. Capital out- 
lays in 1955 for land and water improvements totaled $562 million. x 
Expenditures under Soil Conservation Service and Agricultural Con- 
servation Program Service programs for practices that increased the 
productive value of land have totaled several hundred million dollars 
annually. Sizable capital outlays under other federal and state 



1 Farmers' Expenditures in 1955, USDA, and Dept. of Commerce, AMS-354, Washington, 
D. C, Dec, 1959. 



106 



WILLIAM H. SCOFIELD AND GLEN T. BARTON 



Table 6.2. Productive Assets Used in Agriculture, 1947-49 Prices, 
United States, Specified Periods, 1940-59 a 



Period 


Farm 
real 
estate 


Livestock 


Machinery 

and 

motor 

vehicles 


Feed 

crops 

inventory 


Working 
capital 


Total, 

excluding 

real 

estate 


Total 








(billion dollars) 








1940-42 


57.9 


13.3 


4.4 


5.8 


2.8 


26.3 


84.2 


1944-46 


60.4 


15.0 


4.4 


6.0 


4.0 


29.4 


89.8 


1947-49 


62.0 


13.2 


6.2 


5.9 


4.0 


29.3 


91.3 


1950-52 


63.6 


13.6 


9.5 


6.2 


4.3 


33.6 


97.2 


1953-55 


64.7 


14.5 


10.7 


6.2 


4.2 


35.6 


100.3 


1956-58 


65.5 


14.5 


10.4 


7.0 


4.1 


36.0 


101.5 


1959 


65.8 


14.8 


10.2 
Index numbers, 


8.2 
1940 = 100 


4.1 


37.3 


103.1 


1940-42 


101 


103 


108 


104 


109 


105 


102 


1944-46 


106 


116 


108 


109 


155 


117 


109 


1947-49 


108 


102 


149 


108 


155 


117 


111 


1950-52 


111 


106 


232 


113 


164 


134 


118 


1953-55 


113 


112 


261 


113 


163 


142 


122 


1956-58 


115 


112 


254 


128 


157 


143 


123 


1959 


115 


115 


249 


149 


158 


149 


125 



See footnotes to Table 6.1. 



programs and projects ranging from flood control to highways have 
added indirectly to the value of farm real estate. If all such invest- 
ments in land (both private and public), less allowance for depletion 
and other losses in capital values, could be included, the net increase 
in the productive value of farm real estate would likely be greater than 
is indicated by our present estimates. 

The quality of other productive assets has also been improved, 
particularly in the case of machinery, equipment, and livestock (cf. 
Chapter 7). Constant-dollar valuations fail to reflect adequately these 
increases in the quality of productive assets. The same limitation ap- 
plies to the measures of real estate inputs and other production inputs 
discussed below. The important influence of increases in quality of 
assets and inputs is reflected, however, when changes in volume of 
farm output are related to changes in volume of assets and inputs. In 
most instances, changes in quality are synonymous with advances in 
technology. Technological improvement, in turn, has been the chief 
factor in the rise in productivity of assets and inputs. 

The most outstanding change in the capital structure of agriculture 



TECHNOLOGY AND CHANGES IN CAPITAL STRUCTURE 107 

has been the great increase in productive assets per farm. From 1940 
to 1959, the number of farms decreased by 1.7 million, or 27 percent. 
This contributed to the large increase in volume of assets per farm 
(Table 6.3). Although volume of productive assets rose only 25 percent 
from 1940 to 1959, assets per farm increased more than 70 percent. 
During the period, the volume of real estate and livestock inventories 
per farm increased by more than half, feed-crop inventories and work- 
ing capital doubled, and numbers of machines and motor vehicles more 
than tripled. In terms of dollars, the increase in assets per farm was 
substantially greater; by January 1, 1959, the average value of all pro- 
ductive assets per farm exceeded $33,000, about five and one-half 
times the average value in 1940. 



Table 6.3. Productive Assets Per Farm in 1947-49 Prices, United States, 
Specified Periods, 1940-59 a 



Period 


Farm 

real 

estate 


Livestock 


Machinery 

and motor 

vehicles 


Feed 

crops 

inventory 


Working 
capital 


Total, 

excluding 

real 

estate 


Total b 








(dollars) 








1940-42 


9,216 


2,117 


701 


923 


446 


4,187 


13,403 


1944-46 


10,125 


2,514 


738 


1,006 


671 


4,929 


15,054 


1947-49 


10,691 


2,277 


1,069 


1,017 


690 


5,053 


15,744 


1950-52 


11,491 


2,457 


1,716 


1,120 


777 


6,070 


17,561 


1953-55 


12,445 


2,789 


2,058 


1,192 


808 


6,847 


19,292 


1956-58 


13,483 


2,984 


2,141 


1,441 


844 


7,410 


20,893 


1959 


14,190 


3,192 


2,200 
Index numbers, 


1,768 
, 1940 = 100 


884 


8,044 


22,234 


1940-42 


102 


104 


109 


107 


109 


106 


103 


1944-46 


112 


124 


114 


116 


164 


125 


116 


1947-49 


119 


112 


165 


117 


169 


128 


121 


1950-52 


128 


121 


266 


129 


190 


154 


135 


1953-55 


138 


137 


319 


138 


198 


173 


149 


1956-58 


150 


147 


331 


166 


206 


187 


161 


1959 


158 


157 


341 


204 


216 


203 


172 



a See footnotes to Table 6.1. Numbers of farms used in computing averages are as 

estimated by the USDA. 
b These estimates differ slightly from those shown in the Balance Sheet of Agriculture 

because of downward revisions in the constant-dollar value of farm land and service 

buildings. 



108 WILLIAM H. SCOFIELD AND GLEN T. BARTON 

RELATION OF PRODUCTIVE ASSETS TO INPUT AND OUTPUT 

Changes in the volume and composition of the stocks of productive 
assets on farms have been closely interrelated with the marked changes 
in the input structure of agriculture. 

Farm real estate dominated the asset structure of agriculture from 
1940 to 1959, accounting for about two-thirds of the stocks of all pro- 
ductive assets. However, when real estate inputs are considered in 
relation to all inputs, real estate becomes a relatively minor factor. 
Real estate input — chiefly the constant- dollar value of interest on in- 
vestment in real estate and depreciation and repairs of service build- 
ings — accounted for approximately 15 percent of total inputs throughout 
the period since 1940. 2 

Whereas farm real estate dominated the stocks of productive as- 
sets, farm labor dominated the input structure of agriculture. In con- 
trast to real estate, however, the relative importance of farm labor 
decreased substantially during these two decades. In 1940 farm labor 
made up more than half (56 percent) of total inputs. By 1958 the pro- 
portion had declined to 30 percent. 3 

The data in Table 6.4 indicate a major feature of structural change 
in agriculture — the substitution of nonfarm inputs for both farm labor 
and farm land. Inputs of farm labor decreased by almost half since 
1940. The absolute volume of real estate inputs showed a moderate in- 
crease in contrast to a near doubling in volume of inputs other than 
labor and real estate. 

Changes in stocks of productive assets and in inputs used in agri- 
culture can be contrasted in another important respect. Stocks of all 
productive assets increased 25 percent from 1940 to 1959, but the de- 
cline in labor inputs largely offset the increase in nonreal estate 



2 The measurement of inputs of real estate is based on the concept of annual flow of real 
estate services, in contrast to the concept of stock of capital goods used in measuring the 
the volume of real estate. The bulk of the real estate input consists of an interest charge on 
investment in land and buildings exclusive of operators' dwellings. Such an interest charge 
was calculated for the average of the period 1947-49. This interest charge was multiplied 
by an index of the physical volume of real estate (converted to a 1947-49 base) to derive 
annual charges for the period beginning in 1940. The index used was based chiefly on a 
series developed by Alvin S. Tostlebe in cooperation with the National Bureau of Economic 
Research. 

Other annual real estate inputs include grazing fees, depreciation, accidental damage, 
and repairs of service buildings, all expressed in 1947-49 dollars. 

Real estate inputs measured in this way increased 7 percent from 1940 to 1956-58. This 
contrasts with an increase during the same period of 15 percent in the 1947-49 dollar value 
of real estate assets. The difference in rate of change in real estate assets and inputs is due 
partly to differences in concepts of the two measures. The major difference, however, arises 
from revisions in the estimates of value of land and service buildings in 1947-49 dollars. 

If the revised estimates of the constant-dollar value of real estate presented in this 
chapter had been used in the input calculations, inputs of real estate would have risen from 
1940 to 1958 by 12 instead of 7 percent. However, the revised estimates of real estate input 
would change the index of total production inputs for 1958 by less than 1 percent. 

3 The data on farm inputs presented here and elsewhere in this chapter are taken from 
R. A. Loomis and G. T. Barton, Productivity of Agriculture, United States, 1870-1958, USDA 
Tech. Bui. (In press.) 



TECHNOLOGY AND CHANGES IN CAPITAL STRUCTURE 109 





Table 6.4. Inputs Used in 


Agriculture, United States, Specified Periods, 


1940-59 a 




Period 


Farm 
labor 


Real 
estate 


Power 

and 

machinery 


Feed, seed, 

and 

livestock 

purchases 


Fertilizer 


Miscellaneous 


Total, 

excluding 

farm 

labor 
and real 

estate 


Total 










Index numbers, 


1940 = 100 a 








1940-42 


100 


99 


106 




110 


110 


101 


105 


101 


1944-46 


93 


96 


129 




152 


170 


104 


124 


103 


1947-49 


82 


102 


172 




159 


208 


107 


143 


103 


1950-52 


73 


106 


217 




172 


266 


119 


169 


106 


1953-55 


65 


108 


233 




184 


313 


126 


180 


105 


1956-58 


56 


107 


237 




211 


338 


134 


192 


104 


1959 


54 


d 


d 




d 


d 


d 


d 


d 



a 1947-49 price weights were used in combining inputs. The concept of flow of resource services is 
used in calculating the input measures; this contrasts with the "stock" concept used in measuring 
value and volume of productive assets. 

The index of inputs of real estate differs from the index of capital stock of real estate shown in other 
tables. The two measures differ in concept and also in other respects described in a text footnote. 

c Excludes value of interf arm transactions. 
Not available. 

capital and other nonfarm inputs, thus resulting in little change in total 
inputs over the period 

Resource adjustment, technology, and other structural changes have 
brought about significant changes in productivity of the assets and in- 
puts used in agriculture. Volume of farm output rose by more than 50 
percent in the two decades following 1940. As the volume of productive 
assets used in agriculture increased by a smaller proportion and the 
total quantity of inputs changed relatively little, average productivity of 
total assets and inputs rose significantly over the period (Table 6.5). 

Output per unit of total productive assets increased by more than 
one-fifth from 1940 to 1959. Volume of nonreal estate assets increased 
in about the same proportion as output. The process of combining an 
increased quantity of other assets with a relatively fixed amount of 
real estate contributed to the rise in average productivity of all assets. 

Gains in productivity per unit of total inputs were even more strik- 
ing. By 1956-58 output per unit of total inputs was almost 40 percent 
larger than in 1940. Shifts in the composition of inputs, advances in 
technology and other structural changes, including a large increase in 
average size of farms, combined to bring about this substantial gain in 
resource efficiency. 



Substitution of Nonfarm Inputs for Farm Labor and Farm Land 

The growing importance of nonfarm inputs in agricultural produc- 
tion and their impact on the capital structure and productivity of agri- 
culture merits further appraisal and analysis. The rapid substitution 



110 



WILLIAM H. SCOFIELD AND GLEN T. BARTON 



Table 6. 5. Average Productivity of Assets and of Inputs Used in Agriculture, 
United States, Specified Periods, 1940-59 









Farm 


output per unit of 








Productive assets 


a 


Inputs 




Real 






Farm 


Real 






Period 


estate 


Other 


Total 


labor 


estate 


Other 


Total 






Index numbers 


, 1940 = 100 








1940-42 


106 


102 


104 


107 


108 


102 


105 


1944-46 


111 


100 


108 


127 


123 


95 


115 


1947-49 


113 


105 


110 


149 


119 


85 


118 


1950-52 


115 


95 


108 


175 


120 


76 


120 


1953-55 


119 


95 


110 


209 


125 


75 


128 


1956-58 


125 


100 


116 


255 


134 


75 


138 


1959 


132 


102 


122 


281 


b 


b 


b 



a Based on 1947-49 prices. See footnotes, Table 6.1. 
b Not available. 



of capital and nonfarm inputs for farm labor was perhaps the most out- 
standing change in agriculture during the two decades. 

The volume of total productive assets per man-hour of farm labor 
used in 1959 was more than twice as great as in 1940. Similar in- 
creases occurred in real estate assets and livestock inventories per 
man-hour. Stocks of machinery and motor vehicles per man-hour 
were more than four and one-half times as great at the end of the 20- 
year period as at the beginning. 

A similar picture prevails when the various categories of inputs 
are related to man-hours of farm labor. The volume of all inputs other 
than farm labor and real estate used per man-hour in 1956-58 was al- 
most three and one-half times the amount used per man-hour in 1940. 
Especially noteworthy were the increases in inputs of fertilizer and 
lime, and in the amount of mechanical power and machinery per man- 
hour. 

Farmers responded to some powerful economic incentives in sub- 
stituting capital and nonfarm inputs for labor. Throughout the two 
decades, a substantial differential between farm and nonfarm earnings 
persisted (Table 6.6). This economic "pull,* plus the existence of non- 
farm employment opportunities throughout most of the period, resulted 
in a large migration of workers from farm to nonfarm jobs. An im- 
portant corollary development was a sharp rise in farm wage rates to 
a level in 1959 more than four and one-half times that of 1940. 

The rise in the price of labor from 1940 to 1959 was substantially 
greater than that for any other input (Table 6.6). This encouraged 
farmers to substitute capital and other inputs for labor. The decline in 



TECHNOLOGY AND CHANGES IN CAPITAL STRUCTURE 111 

Table 6.6. Relative Prices of Farm Labor, and Related Data, United States, 
Specified Periods, 1940-59 





Ratio of farm 


Prices 




Ratio of farm wage 


rates to prices 


paid for 




to nonfarm 
income per 


received 
by 














Parity 


Motor 


Farm 




Real estate 


Period 


capita a 


farmers 


ratio 


vehicles 


machinery 


Fertilizer 


per acre 








Index numbers, 1940 = 


100 








(percent) 














1940-42 


43 


128 


115 


118 


123 


122 


122 


1944-46 


56 


213 


136 


208 


239 


228 


167 


1947-49 


58 


271 


134 


187 


214 


226 


162 


1950-52 


54 


283 


127 


173 


188 


235 


150 


1953-55 


48 


244 


109 


180 


193 


246 


146 


1956-58 


47 


238 


103 


178 


192 


275 


142 


1959 


b 


240 


100 


180 


193 


303 


136 


a Based on 


incomes from all 


sources. 












b Not available. 















the general level of prices received and in the parity ratio during the 
period had little effect upon the pace at which other inputs were sub- 
stituted for farm labor. The continued high relative price of labor and 
a continuing reserve of unused technology enabled farmers to lower 
unit production costs on their own farms by replacing labor with capital 
and other inputs. This means of lowering costs was available to 
farmers as individuals and was subject to their decisions, but owing to 
the economic structure of agriculture, an individual farmer cannot af- 
fect prices received for his commodities through his own production 
decisions. The adjustments in resource use made by farmers in their 
efforts to lower costs generally, also increased volume of output (cf. 
Chapter 10). The aggregate effect of this was to lower prices received 
during much of the post-World War II period 

The large decline in number of farms and the sharp increase in 
average size of farms were directly related to the substitution of capi- 
tal and nonfarm inputs for farm labor and farm land (cf. Chapter 7). 
Moreover, the need for adjusting farm size to the changing require- 
ments for assets and inputs had an important influence on real estate 
values. With a fixed supply of operator and family labor and a growing 
stock of machines and mechanical power, some farmers found it pos- 
sible to reduce unit costs of production substantially through enlarging 
their farms by renting and buying land. This demand for land for farm 
enlargement contributed significantly to the rise in value of real estate 
per acre, particularly after the end of World War EL 

In one important respect, real estate is unique among the various 
productive assets and inputs used in agriculture. Although demand for 
farm land for nonfarm uses and purchases by nonfarm residents are 
important in many areas, the value of farm real estate is determined 
largely by forces within agriculture itself. Except for purchased feed, 
seed, and livestock, prices of other productive assets and inputs 



112 WILLIAM H. SCOFIELD AND GLEN T. BARTON 

(including labor) used in agriculture are determined mainly in the non- 
farm sector of the economy. 

The rise in the market value of farm real estate per acre rivaled 
the increase in wage rates over the 20-year period under considera- 
tion. By 1959 per-acre values were three and one-half times the 1940 
level. As a consequence, the price of real estate increased relative to 
the prices of most other assets and inputs except labor. The increase 
in relative price of real estate thus provided an economic incentive for 
substituting other assets and nonfarm inputs for farm land, as well as 
for farm labor. Other productive assets, except total livestock, in- 
creased relative to farm real estate. The same relationship exists 
when the various categories of inputs other than labor are compared 
with real estate. Especially impressive is the rapid increase in the 
quantity of fertilizer and lime used per unit of farm real estate. 



CHANGES IN THE CAPITAL STRUCTURE OF 
SOUTHERN AGRICULTURE 

Many of the economic forces responsible for changes in the capital 
structure of agriculture in the nation also have been present in the 
South. 4 There are several changes that are either unique to the south- 
ern region or that have occurred at slower or faster rates than else- 
where. Major shifts in land use are perhaps the most striking. In 
contrast to the national picture of little change in total acreage of crop- 
land, the Southeast shows a decline since 1940 of about a third — the 
Appalachian region, a fourth. Despite the sharp trend away from crop 
production and an increase in output of livestock and livestock products, 
the increase in total farm output has lagged behind the national trend 
(cf. Chapter 1). 

The tenfold increase in the value of machinery and equipment in the 
two southern regions since 1940 documents the conversion from horse 
and mule to mechanical power that had largely occurred in most other 
regions a decade or so earlier. This delayed process of mechaniza- 
tion, together with the sharp decline in acreage of crops requiring a 
great deal of labor, contributed to somewhat greater reductions in labor 
inputs in the two regions than in other regions. 

Another basic characteristic of southern farms has been their 
small acreages and low capital investments in both land and nonland 
resources (cf. Chapter 14). Before mechanization occurred, land was 
by far the major item of productive capital in the South, and it still ac- 
counts for about 70 percent of total assets — about the same as for the 
nation. Although asset values per farm have risen sharply under the 
combined effect of fewer and larger farms, more assets, and rising 



4 Two production regions — the Appalachian and the Southeast — are included in the sta- 
tistical analysis that follows. The former region includes Virginia, West Virginia, North 
Carolina, and Tennessee; the latter includes South Carolina, Georgia, Florida, and Alabama. 
The terms "South" and "southern regions" refer to both regions collectively. 



TECHNOLOGY AND CHANGES IN CAPITAL STRUCTURE 113 

prices per unit, productive assets per farm in the South are still less 
than half the national average (Table 6.7). 

Part-time, residential, and other noncommercial farms represent 
a substantially greater proportion of all farms in the South than in 
most other regions. The inclusion of such farms in the "all farm" 
totals distorts comparisons with other regions and with national aver- 
ages. Values of real estate are affected most because of the relatively 
high per-acre value of noncommercial farms. More than a fifth of the 
total value of farm land and buildings in the two southern regions was 
included in part-time and residential farms in 1954. Nationally, the 
proportion was about 10 percent, but nearly a third of this was 



Table 6.7. Selected Measures of Capital Investments, United States, Appalachian 
Region, and Southeast, Specified Periods, 1940-59 







Productive assets a 
(current dollars) 




Productive assets b 
(1947-49 dollars) 


Area and 
period 


Per farm 


Per dollar Per dollar 
net income labor input 


Per farm 


Per man-hour 
of labor 






(dollars) 








United States 
1940-42 


6,628 


5.92 


7.56 


13,403 


4.13 


1947-49 


15,734 


5.90 


7.71 


15,744 


5.45 


1953-55 


23,102 


9.58 


11.10 


19,292 


7.57 


1956-58 


27,281 


10.55 


12.93 


20,893 


8.80 


1959 


33,455 


13.16 


14.26 


22,234 


9.33 


Appalachian 
1940-42 


3,129 


4.50 


6.73 


6,578 


2.50 


1947-49 


7,109 


4.48 


5.67 


7,113 


2.87 


1953-55 


9,450 


5.75 


7.56 


7,952 


4.19 


1956-58 


10,994 


6.88 


9.05 


8,624 


5.46 


1959 


13,028 


8.10 


d 


9,365 


d 


Southeast 
1940-42 


2,762 


4.15 


4.71 


5,218 


2.23 


1947-49 


6,596 


4.39 


4.96 


6,589 


3.53 


1953-55 


10,845 


6.00 


8.12 


8,893 


6.49 


1956-58 


14,479 


7.65 


11.52 


10,106 


9.15 


1959 


18,590 


8.72 


d 


11,184 


d 



a Market value of farm land and service buildings (March 1), inventory values 
(January 1) of machinery and equipment (less family share of automobiles), live- 
stock, feed crops stored on farms, and working capital. 

b Each class of asset was revalued in terms of 1947-49 prices. 

c Market value of labor input was derived by multiplying total man-hours by the aver- 
age cash wage rate per hour for hired labor (without room and board). 

d Not available. 



114 WILLIAM H. SCOFIELD AND GLEN T. BARTON 

concentrated in the South. Estimates of nonreal estate capital are 
probably not distorted as much by the inclusion of noncommercial 
farms, but total investments per farm for the commercial group would 
be substantially higher than are shown by the averages for all farms. 
However, the rates of change may not be affected this greatly because 
noncommercial farms have remained about the same proportion of all 
farms over time. 

The estimates of productive assets in both current and constant 
dollars calculated for the Appalachian region and the Southeast are 
reasonably comparable with the national estimates discussed earlier in 
this chapter. Valuations of nonreal estate assets in 1959 dollars were 
converted to 1947-49 dollars by applying the same changes in prices 
that were used in calculating the national series. The regional or state 
indices of average value of farm real estate per acre were used to de- 
flate the 1959 dollar valuations of land and service buildings in each of 
these regions. Changes shown in the constant-dollar valuations are 
assumed to reflect primarily changes in the physical quantities of pro- 
ductive assets. 

Changes in the value of productive assets for the Southeast are in- 
fluenced strongly by the inclusion of Florida in the region. Market 
values of farm real estate have increased more in Florida than in any 
other state, and between 1940 and 1954 about 10 million acres were 
added to land in farms. The remaining three states (Alabama, Georgia, 
and South Carolina) showed an increase of only 800,000 acres. A part 
of the increase in market values per acre in Florida can be attributed 
to the substantial increases in citrus acreage, improved pasture, 
drainage, and land-clearing that represent real gain in productive as- 
sets. However, as a result of the rapid growth in population and ex- 
pectations of future growth, market values also have been strongly in- 
fluenced by nonfarm demands. Although trends in values of nonreal 
estate assets are similar to those shown by other states in the region, 
when possible, Florida was excluded from the estimates for the South- 
east. 



Changes in Real Estate and Nonreal Estate Assets 

As at the national level, land and service buildings in each of the 
two southern regions represented about 70 percent of the total produc- 
tive assets of the regions in 1959. Although between 1940 and 1950 the 
value of real estate in the South did not rise as much as did values of 
nonreal estate assets, real estate increased more than have other as- 
sets in the late 1950's. Within the nonreal estate group, machinery, 
motor vehicles, and livestock showed the largest gains. 

Increases in the value of livestock were substantially greater in the 
two southern regions than in the country as a whole from 1940 through 
1950-52, but both regions showed declines from 1950-52 to 1956-58 
(Tables 6.8 and 6.9). Estimates for 1959, however, indicated a sharper 
increase in these two regions since 1956-58 than nationally. 



TECHNOLOGY AND CHANGES IN CAPITAL STRUCTURE 115 



Table 6.8. 


Appalachian Region: Productive Assets Used in 
in Current Prices, Specified Periods, 1940-59 a 


Agriculture, 




Period 


Farm 
real 
estate 


Livestock 


Machinery 

and motor 

vehicles 


Feed 

crop 

inventory 


Working 
capital 


Total, 

excluding 

real 

estate 


Total, 

all 
assets 








(million dollars) 








1940-42 


2,538 


457 


150 


201 


124 


932 


3,470 


1944-46 


3,799 


717 


280 


392 


209 


1,598 


5,399 


1947-49 


5,226 


954 


446 


484 


289 


2,173 


7,399 


1950-52 


5,928 


1,093 


908 


463 


339 


2,803 


8,731 


1953-55 


6,295 


815 


1,140 


346 


369 


2,670 


8,965 


1956-58 


7,036 


789 


1,228 


359 


358 


2,734 


9,770 


1959 


7,907 


1,127 

] 


1,331 

[ndex numbers, 


372 
1940 = 100 


370 


3,200 


11,107 


1940-42 


103 


106 


109 


128 


113 


111 


105 


1944-46 


154 


166 


204 


250 


190 


191 


164 


1947-49 


212 


220 


326 


308 


263 


260 


224 


1950-52 


241 


252 


663 


295 


308 


335 


265 


1953-55 


256 


188 


832 


220 


335 


319 


272 


1956-58 


286 


182 


896 


229 


325 


327 


296 


1959 


321 


260 


972 


237 


336 


382 


337 



*See footnote a, Table 6.7. 

Total investment at current prices in 1956-58 amounted to about 
$11,000 per farm in the Appalachian region and $14,500 in the South- 
east, compared with the national average of $27,300. Further in- 
creases in market values of both real estate and nonreal estate capital 
items since 1956-58 have raised average investments per farm to about 
$13,000 in the Appalachian region and $18,600 in the Southeast. 

A revaluation of assets in 1947-49 dollars shows that most of the 
gains occurred in the nonreal estate sector. The constant-dollar value 
of real estate declined 10 percent in the Appalachian region between 
1940 and 1956-58, but increased nearly 50 percent in the Southeast, 
chiefly because of Florida (Tables 6.10 and 6.11). If an adjustment is 
made for the atypical acreage change in that state, the real increase in 
real estate for the Southeast is only about 10 percent. 

Between 1940 and 1956-58, the volume of nonreal estate assets in- 
creased by about 50 percent in the Appalachian region and 72 percent 
in the Southeast, compared with 42 percent for the nation. On a per- 
farm basis, the increases were 88 and 127 percent, respectively. Total 
assets per farm increased by a third in the Appalachian region and 



116 



WILLIAM H. SCOFIELD AND GLEN T. BARTON 



Table 6.9. Southeast Region, Excluding Florida: Productive Assets Used in 
Agriculture in Current Prices, Specified Periods, 1940- 59 a 



Period 


Farm 
real 
estate 


Livestock 


Machinery 

and motor 

vehicles 


Feed 

crop 

inventory 


Working 
capital 


Total, 

excluding 

real 

estate 


Total, 

all 
assets 








(million dollars) 








1940-42 


1,041 


232 


68 


83 


68 


451 


1,492 


1944-46 


1,630 


366 


138 


179 


125 


808 


2,438 


1947-49 


2,350 


426 


232 


170 


166 


994 


3,344 


1950-52 


2,687 


482 


476 


169 


206 


1,333 


4,020 


1953-55 


3,020 


385 


596 


114 


241 


1,336 


4,356 


1956-58 


3,508 


368 


652 


137 


241 


1,398 


4,906 


1959 


4,104 


543 


703 
Index numbers, 


127 

, 1940 = 100 


250 


1,623 


5,727 


1940-42 


106 


105 


111 


124 


105 


109 


107 


1944-46 


167 


165 


226 


267 


192 


195 


175 


1947-49 


240 


192 


380 


254 


255 


240 


240 


1950-52 


275 


217 


780 


252 


317 


321 


289 


1953-55 


309 


173 


977 


170 


371 


322 


313 


1956-58 


359 


166 


1,069 


204 


371 


337 


352 


1959 


420 


244 


1,152 


190 


385 


391 


411 



a See footnote a, Table 6.7. 

almost doubled in the Southeast, compared with a 60 percent increase 
nationally. 



Capital-Income and Capital-Labor Coefficients 



The level of capital investments in relation to net farm income and 
changes in this relationship over time have meaning with respect to the 
marginal efficiency of capital and the valuation of assets, particularly 
real estate. Future adjustments in size of farm and entry into agricul- 
ture are affected also by the amounts of capital associated with given 
levels of net income. 

Although throughout the period the amount of investment in produc- 
tive assets per dollar of net income has remained a little lower in the 
South than in the nation as a whole, both show a substantial increase 
since 1947-49. In 1940-42 and 1947-49, about $6 of capital was asso- 
ciated with a dollar of net income nationally, compared with about 
$4.50 in each of the southern regions (Tables 6.12 and 6.13). By 



TECHNOLOGY AND CHANGES IN CAPITAL STRUCTURE 117 

Table 6.10. Appalachian Region: Productive Assets Used in Agriculture, in 
1947-49 Prices, Specified Periods, 1940-59 a 



Period 


Farm 

real 

estate 


Livestock 


Machinery 

and motor 

vehicles 


Feed 

crop 

inventory 


Working 
capital 


Total, 

excluding 

real 

estate 


Total 








(million dollars) 








1940-42 


5,521 


781 


241 


534 


226 


1,782 


7,303 


1944-46 


5,308 


871 


252 


528 


288 


1,939 


7,247 


1947-49 


5,226 


957 


438 


500 


288 


2,183 


7,409 


1950-52 


5,156 


1,091 


756 


502 


308 


2,657 


7,813 


1953-55 


4,996 


986 


884 


363 


315 


2,548 


7,544 


1956-58 


5,086 


950 


874 


464 


300 


2,588 


7,674 


1959 


5,004 


1,297 


864 

[ndex numbers, 


524 
1940 = 100 


296 


2,981 


7,985 


1940-42 


99 


93 


107 


116 


107 


102 


100 


1944-46 


95 


104 


112 


114 


136 


112 


99 


1947-49 


93 


114 


194 


108 


136 


126 


101 


1950-52 


92 


130 


336 


109 


145 


153 


106 


1953-55 


89 


118 


393 


78 


148 


146 


102 


1956-58 


91 


114 


388 


105 


142 


149 


104 


1959 


89 


155 


384 


113 


140 


172 


109 



See footnote a, Table 6.7. 

1956-58 the capital-income ratio had increased to about $10.50 for the 
country as a whole, and to about $7 in the South. Ratios for 1959 
showed a further increase, chiefly because the value of real estate 
continued to rise while farm income declined. 

Productive assets may be related also to the market value and the 
physical quantity of the labor input. 5 If current-dollar values of assets 
are divided by the market value of the labor input, the resulting meas- 
ure retains changes in both quantities and prices of assets and labor. 
The increase in capital investment per dollar of labor input provides 
further evidence of the extent to which capital has been substituted for 
labor. The capital-labor ratio calculated in this way can aid also in 
projecting possible future capital requirements under varying assump- 
tions as to trends in wage rates and labor requirements. 

About $7.50 of productive assets was associated with a dollar input 
of farm labor in 1940-42 nationally, about $6.75 in the Appalachian 



5 Total man-hours used in farm production were multiplied by the cash wage rate per 
hour for hired farm workers (without room and board) to obtain the market value of the labor 
input. 



118 



WILLIAM H. SCOFIELD AND GLEN T. BARTON 



Table 6.11. Southeast Region: Productive Assets Used in Agriculture in 1947-49 Prices, 
Specified Periods, 1940-59 a 





Farm real estate 






• 




Southeast region 




Alabama, 




Total, 






South 






Machinery 






excluding 


Total, 




Carolina, 






and motor 


Feed crop 


Working 


real 


all 


Period 


Georgia 


Florida 


Livestock 


vehicles 


inventory 


capital 


estate 


assets 








(million dollars) 










1940-42 


2,183 


545 


437 


143 


232 


168 


980 


3,708 


1944-46 


2,241 


708 


532 


159 


251 


242 


1,184 


4,133 


1947-49 


2,349 


802 


527 


277 


182 


224 


1,210 


4,361 


1950-52 


2,420 


917 


660 


476 


189 


253 


1,578 


4,915 


1953-55 


2,350 


1,125 


653 


556 


126 


285 


1,620 


5,095 


1956-58 


2,398 


1,258 


629 


560 


190 


280 


1,659 


5,315 


1959 


2,381 


1,261 


901 


551 


238 


276 


1,966 


5,608 








Index numbers, 1940 


= 100 








1940-42 


101 


110 


94 


109 


114 


101 


101 


102 


1944-46 


103 


143 


114 


121 


124 


145 


122 


114 


1947-49 


108 


162 


113 


211 


90 


134 


125 


120 


1950-52 


112 


185 


142 


363 


93 


151 


163 


135 


1953-55 


108 


227 


140 


424 


62 


171 


168 


140 


1956-58 


110 


254 


135 


427 


94 


168 


172 


146 


1959 


110 


255 


193 


421 


117 


165 


203 


154 



L See footnote a, Table 6.7. 



region, and only $4.75 in the Southeast. By 1956-58 the capital invest- 
ment for the nation had increased to about $13 per dollar of labor, 
whereas capital investment for the Appalachian region had increased to 
only $9. In percentage terms, these are gains of 70 and 34 percent, 
respectively. The increase to about $11.50 in the Southeast is substan- 
tially greater (145 percent), but again, it was strongly influenced by the 
large rise in total value of real estate in Florida. Perhaps the most 
significant conclusion pertains to the Appalachian region, in which the 
level of capital appears to be relatively low in relation to the labor in- 
put. Despite large absolute increases in total capital, it has not in- 
creased as much in this region relative to labor costs as has the na- 
tional average or the level in the Southeast. 

The effects of changes in price are removed if the constant-dollar 
values of assets are related to man-hours of labor. Investment per 
hour of labor shows the extent to which physical quantities of produc- 
tive assets associated with an hour of labor have increased over time. 
The increases shown by this measure are substantially greater than 
those shown by the same measure expressed in 1959 dollars because 
the number of man-hours of labor declined at about the same rate at 
which wage rates per hour increased. As a result, the market value of 
the labor input has remained relatively stable since 1950. Thus, the 
increase in capital investment associated with a dollar of labor input 
results chiefly from the increases in value of total assets. The in- 
crease in quantities of productive assets per man-hour is due primarily 
to the substantial decline in total man-hours as assets changed rela- 
tively little. 



TECHNOLOGY AND CHANGES IN CAPITAL STRUCTURE 119 

Table 6.12. Appalachian Region: Selected Measures of Capital Investments, 
in Current Prices, Specified Periods, 1940-59 a 





Average 

Real 
estate 


investment 

Nonreal 
estate 


per farm 
Total 


Investment per 

dollar of net 

income b 


Investment 


Period 


Real Nonreal 
estate estate 


per dollar 

of labor 

input 








(dollars) 






1940-42 


2,288 


841 


3,129 


3.31 1.19 


6.73 


1944-46 


3,582 


1,508 


5,090 


2.47 1.04 


4.55 


1947-49 


5,020 


2,089 


7,109 


3.16 1.32 


5.67 


1950-52 


5,896 


2,790 


8,686 


3.40 1.60 


6.86 


1953-55 


6,636 


2,814 


9,450 


4.05 1.71 


7.56 


1956-58 


7,918 


3,076 


10,994 


4.96 1.92 


9.05 


1959 


9,275 


3,753 


13,028 


5.77 2.33 


— 






Index numbers, 194C 


= 100 




1940-42 


104 


113 


106 


78 83 


91 


1944-46 


163 


202 


173 


59 73 


61 


1947-49 


229 


280 


242 


75 92 


77 


1950-52 


269 


373 


295 


81 112 


93 


1953-55 


302 


377 


321 


96 120 


102 


1956-58 


361 


412 


374 


118 134 


122 


1959 


423 


502 


443 


137 163 


— 



See footnote a, Table 6.7. 
' Net income of farm operators, including changes in inventories. 



A LOOK AT THE FUTURE 

Further significant changes in the capital structure of agriculture 
can be expected. Some perspective as to the direction and magnitude 
of such changes for the nation can be gained (1) by using 1975 as a tar- 
get date, and (2) by utilizing previous USDA projections of farm output, 
labor productivity, and number of commercial farms. 6 Using 1957 as a 
base year, these projections indicate that a needed increase of 40 per- 
cent in farm output could be attained with a third less farm labor. The 



6 G. T. Barton and R. F. Daly, "Prospects for agriculture in a growing economy," in 
Problems and Policies of American Agriculture, Iowa State University Press, Ames, Iowa, 
1959; and K. L. Bachman, "Prospective changes in the structure of farming," paper pre- 
sented at 36th National Agricultural Outlook Conference, Washington, D. C, Nov. 18, 1958. 



120 



WILLIAM H. SCOFIELD AND GLEN T. BARTON 



Table 6.13. Southeast Region, Excluding Florida: Selected Measures of 
Capital Investments, Current Prices, Specified Periods, 1940-49 a 





Average investment per farm 

Real Nonreal 
estate estate Total 


Investment per 

dollar of net 

income b 


Period 


Real 
estate 


Nonreal 
estate 






(dollars) 






1940-42 


1,669 


724 


2,393 


2.59 


1.11 


1944-46 


2,684 


1,332 


4,016 


2.12 


1.05 


1947-49 


3,924 


1,660 


5,584 


2.89 


1.19 


1950-52 


4,826 


2,394 


7,220 


2.98 


1.48 


1953-55 


5,924 


2,618 


8,542 


3.97 


1.77 


1956-58 


7,585 


3,021 


10,606 


5.20 


2.08 


1959 


9,391 


3,787 
Index numbers, 


13,178 
1940 = 100 


6.10 


2.46 


1940-42 


107 


110 


108 


88 


89 


1944-46 


173 


202 


181 


72 


84 


1947-49 


252 


252 


252 


98 


95 


1950-52 


310 


363 


326 


101 


118 


1953-55 


381 


397 


386 


135 


142. 


1956-58 


488 


458 


479 


176 


166 


1959 


604 


574 


595 


207 


197 


a See footnote a, Table 6.7. 
Net income of farm operators, including changes in 


inventories. 





projection of number of commercial farms in 1975 is 2 million, a third 
less than the 3.1 million in 1954. 

Underlying these projections is a continuation of past trends in 
substitution of capital and nonf arm inputs for both farm labor and farm 
land. These trends and other forces that have affected the capital 
structure of agriculture since 1940 are expected to continue at least 
until 1975. Approximately the same asset structure for 1975 emerges 
by assuming either a continuation of the trend in the total volume and 
composition of productive assets, or alternatively, a continuation of the 
trend in productivity of assets which, in turn, is related to the projected 
increase in volume of farm output. Using 1957 as a base, an increase 
of 20 percent in volume of total assets is expected. This would be con- 
sistent with a rise of 15 percent in real estate assets and about 30 per- 
cent in nonreal estate assets. The implied increase in productivity, or 
of output per unit of total assets, from 1957 to 1975 is more than 15 
percent. 



TECHNOLOGY AND CHANGES IN CAPITAL STRUCTURE 121 

Little change in acreage of farm land is anticipated. Rather, the 
increase of 15 percent in volume of real estate assets is expected to 
come chiefly from land improvements and net investment in service 
buildings and other structures. Further additions to stocks of machine 
and equipment likely will be a dominant factor in the 30 percent rise in 
nonreal estate assets. Substantial increases in capital of this kind will 
be needed to help bring about the projected decrease of a third in inputs 
of farm labor. Increases in size of farms, however, will make possible 
more efficient use of machines and other capital items, and will thus 
hold down the rise in volume of aggregate productive assets. 

As was true from 1940 to 1959, the most striking future change in 
capital structure of agriculture is the expected large increase in vol- 
ume of assets per farm. The extent of this increase will depend 
greatly on the magnitude of the change in number of farms. Here, in- 
ability to separate available basic data on assets, output, and input be- 
tween commercial and noncommercial farms prevents more meaningful 
projections. 

Bachman has projected the number of commercial farms at 2 mil- 
lion for 1975, compared with 3.1 million in 1954. If we assume no 
change in number of noncommercial farms between these two dates, 
the total number of farms would drop by about 15 percent from 1957 to 
1975. An alternative assumption is that the number of noncommercial 
farms will change by the same proportion as commercial farms. This 
projection calls for a decrease of a third in the total number of farms 
from 1957 to 1975. 

Either projection of number of farms results in a further substan- 
tial rise in volume of assets per farm. Productive assets per farm in 
1959 totaled more than $33,000. By 1975 this figure is expected to in- 
crease to $45,000 or $55,000 (1959 prices). Stated another way, the 
average volume of assets per farm would rise above the 1959 level by 
a third under the first assumption regarding farm numbers, and by 
two-thirds under the second assumption. Assets per commercial farm 
in 1975 would be considerably higher than at present. The level may 
be so high that still greater difficulties in financing will arise and ac- 
centuate an already important adjustment problem in agriculture. 



Discussion 



RAYMOND J. DOLL* 

One of the major problems facing economists since the dawn of 
their profession has been that of measurement. In Chapter 6 the 
authors have two major measurement problems. First, how can physi- 
cal units of inputs be used realistically for comparative purposes 
through time in an economy that is dominated by rapid technological 
innovation — particularly when the inputs are not homogeneous either at 
a given time or through time? Second, how can investment in produc- 
tive assets used by farmers be adequately distinguished from the cost 
of inputs per given unit of output for the purpose of analyzing the 
changing capital structure of agriculture? 

The first of these measurement difficulties is always handled by 
economists in the only way that is available to them — namely, by ap- 
plying price and converting all inputs into a common denominator. 
This method, however, has serious limitations which need to be recog- 
nized. Scof ield and Barton recognize these limitations. Almost every- 
one recognizes that the general price level changes from time to time 
and that a dollar's worth of input at one time is not necessarily com- 
parable to a dollar's worth of input at another time. Under these con- 
ditions, the solution usually suggested is to convert prices so they are 
measured in dollars with a constant purchasing power through time. 

Unfortunately, the problem is not this simple. A relatively minor 
problem is that of deciding how the variable prices should be made 
constant. A more important difficulty, however, is that a physical unit 
of input in the technology of 1959 is not the same as was a unit simi- 
larly identified in the technology of 1940 or 1950. For example, the 
1959 gallon of gasoline and tractor or truck are not comparable with 
the prewar gallon of gasoline, tractor, or truck, and, to the best of my 
knowledge, there is no way for making these unlike units comparable 
for comparative purposes. 

The second problem of distinguishing between investment in pro- 
ductive assets and the cost of inputs per unit of output also was well 
handled. This problem has important implications insofar as financing 
agriculture is concerned. Barton and Scofield emphasize the fact that, 
even though farm real estate dominates the asset structure of agricul- 
ture, real estate inputs, in relation to all inputs, become a relatively 
minor factor. Thus, much of the financing done in agriculture is real 
estate financing, even though in terms of inputs it is a minor factor. 

A significantly larger proportion of the dollars that farmers used 
in 1959 for livestock and machinery, compared with 1940, probably 



♦Agricultural Economist, Federal Reserve Bank of Kansas City. 

122 



DISCUSSION 123 

should be classified as production expenses rather than investment in 
productive assets. Animal products not only are produced more rap- 
idly, but specialization has tended to cause more steps to be introduced 
into the productive process and, thus, each farmer handles the live- 
stock for a shorter period of time. In the case of machinery and equip- 
ment, specialization and the trend toward larger farms result in more 
intensive use of the machinery and equipment and also in the use of 
more machinery and equipment rental and hire. Both of these develop- 
ments tend to create a need for more operating capital in relation to 
investment capital. 



Chapter 7 



EARL O. HEADY 

Iowa State University 



Farm Use of Capital 
in Relation to Technical 
Change and Factor Price 



OUTPUT OF FARM PRODUCTS has been increasing rapidly, at 
least relative to domestic demand and population growth. Paral- 
leling this growth has been a change in the resource structure of 
agriculture, particularly in terms of the capital/labor mix of the in- 
dustry. These and other changes in structure of the industry are 
simply reflections of changes being made on individual farms. Aggre- 
gated, individual farm adjustments in use of labor and capital provide 
the industry picture. However, the relative magnitude of these changes 
for the industry are not identical with those of the individual firm or 
farm which makes the decisions and must acquire the resources to 
implement these decisions. 

Technological change is the "label" or "handy term" used to bring 
focus upon the changing structure of agriculture. Considered from the 
standpoint of the economy as a whole, it is technical change and inno- 
vation which have made new materials of production possible and avail- 
able for agriculture (cf. Chapter 1). These changes and innovations 
have resulted from the application of greater knowledge and skill to the 
use of our basic resources. The new materials are diverse capital 
items put to use in agriculture. More of them have been put to use not 
only because of the capital/product price effect, but also because of 
their substitution effects or advantages with labor, i.e., because of 
favorable labor/capital price ratios. Technical discovery or innova- 
tion, as much from the industries outside agriculture as from the public 
research organizations attached to the farming industry, has caused 
these capital items to be known and made available. However, more di- 
rectly it has been the relative prices of the capital items representing 
innovations which have caused them to be adopted and used in greater 
quantity and to be substituted for other resources, such as labor. 

The majority of important innovations in agriculture are reflected 
in a material or resource. These materials are classified in the ag- 
gregate category of capital, e.g., fertilizer, petroleum, power units, 
improved seeds, insecticides, feed additives, and other chemical, bio- 
logical, and mechanical items. Each is a material which must be used 
before the innovation or technique is adopted. The material or capital 
item almost always has a price attached to it. The number of innova- 
tions available to the firm in agriculture, which are not reflected in a 

124 



TECHNICAL CHANGE AND FACTOR PRICE 125 

material or resource, and hence, a price, are few and relatively unim- 
portant. Planting seed at one time rather than another (e.g., potatoes 
in the light of the moon) would be an example, although even then oppor- 
tunity costs in use of labor and other capital items are sometimes in- 
volved. 

Knowledge of innovations is necessary before they and the re- 
sources or capital they represent are put into use in farming. But 
knowledge alone does not cause them to be adopted. Few people in ag- 
riculture innovate purely for the sake of innovation. The majority of, 
or almost all, farmers use a new capital resource (and the innovation 
or technical change it represents) because of the prospective profit in- 
crement from using it. The net return or profit from using it depends 
upon the price of the material or resource relative to (1) the price of 
the product which it produces, (2) the price of other resources for 
which it substitutes, and (3) its productivity. The underlying reason for 
the rapid technical advance in U. S. agriculture, and the parallel trend 
in output, is basically this pricing structure rather than purely scien- 
tific discovery or the sociological explanation of the diffusion of ideas 
and knowledge . 

In order to explain changes in the resource structure and the de- 
mand of farmers and the corresponding requirements in capital, we 
need to explore both the relative prices and productivity of materials 
representing new technology. We also need to explore the nature of 
scale or cost economies associated with many of them. This complex 
of phenomena may make tremendous changes in the capital require- 
ments of individual farms without making similar changes in aggregate 
capital use by the industry because of a reduction in number of farmers. 
Given a series of new technologies with high physical productivity and 
scale or cost economies and a price framework favoring their adoption, 
against a backdrop of inelastic demands for farm products, individual 
farmers can be expected to increase the use of capital inputs. Scale 
can be expected to increase, and while labor on individual farms may 
remain constant or decline only slightly, total farm numbers and labor 
employed will decrease— against a food demand which is fairly constant 
relative to population. Considering the complex of economic factors 
mentioned above, the use of capital items will increase much more 
rapidly among individual farms than it will within the agricultural in- 
dustry as a whole. An individual farmer with the ability to reduce unit 
costs and increase his total profit (without the two necessarily occur- 
ring simultaneously) from use of a specified capital item can expand 
scale against an elastic demand for its products. But the industry must 
expand against an inelastic demand. Hence, an "economic dampener" 
restrains use of resources by the industry, but does not exercise a 
similar degree of restraint upon individual farmers. 

Capital requirements and credit use per farm will undoubtedly in- 
crease markedly in the 1960's and 1970's, but capital use by the agri- 
cultural industry will not show a parallel rate of increase. For this 
reason, financing problems of individual farmers will grow in magnitude 



126 



EARL O. HEADY 



if adjustments (encouraged by current or prospective price relation- 
ships and changes in resource productivities generated by new tech- 
nology) in the industry are to be realized. The basis for this differ- 
ential change will be explained in this chapter. Also, some of the 
changes in the credit structure which may be necessary to allow these 
adjustments in resource mixes of individual farms relative to the in- 
dustry will be discussed. 



DIFFERENCES IN FARM AND INDUSTRY 

The relative difference between individual farm increase and in- 
dustry increase in the use of capital is indicated in Table 7.1. Esti 
mating the total capital used in farming presents some problems of 



Table 7.1. Value of Farm Assets, United States 
and Per Farm Average, 1940-58 





U.S. 




Per farm 




(Current dollars 






Year 


in billions) 


Current dollars 


1947-49 dollars 


1940 


53.0 


6,094 


13,118 


1941 


55.1 


6,340 


13,444 


1942 


62.5 


7,449 


14,076 


1943 


73.3 


8,934 


14,748 


1944 


83.8 


10,328 


15,042 


1945 


93.1 


11,346 


15,100 


1946 


102.0 


12,435 


15,151 


1947 


113.9 


14,154 


15,364 


1948 


125.2 


15,906 


15,509 


1949 


132.1 


17,144 


16,480 


1950 


130.8 


16,979 


16,979 


1951 


149.6 


20,434 


17,742 


1952 


165.6 


23,206 


18,428 


1953 


162.9 


22,946 


19,009 


1954 


159.7 


22,592 


19,631 


1955 


164.7 


23,806 


20,287 


1956 


168.3 


25,096 


21,091 


1957 


176.4 


27,203 


22,499 


1958 


186.4 


29,600 


22,042 



Source: Agricultural Outlook Charts, USDA, Washington, D. C, 1960. 

measurement and aggregation, especially because of the many new 
forms of capital. However, these empirical problems are unimportant 
for the comparisons being made; namely, the differential trends in in- 
dividual farm and industry use of capital. The industry increase in 
assets over the period was about threefold; the individual farm increase 
was almost fivefold. These figures even underestimate the relatively 
greater growth in individual farm (as compared with industry) use of 
capital since they are for all farms. Growth in magnitude of capital in- 
put has been faster for commercial farms than for all farms. 



TECHNICAL CHANGE AND FACTOR PRICE 



127 



Table 7.2. Comparison of Inputs, 1937-41 and 1958, for Specified 
Types of Farms in the United States 













Nonreal estate 


Power and 




Land 


Laboi 




capital 


machinery (index, 


Type of farm 
and location 


(acres) 


(days; 


1 


(dollars) 


1947-49 


=100) 


1937-41 


1958 


1937-41 


1958 


1937-41 


1958 


1937-41 


1958 


Cotton: 


















So. Piedmont 


158 


183 


526 


370 


1,010 


3,120 


54 


142 


Black Prairie, Tex. 


140 


185 


475 


315 


1,580 


5,130 


61 


118 


High Plains, Tex. 


258 


404 


431 


320 


2,530 


8,140 


78 


128 


Delta (small) 


53* 


58 


375* 


274 


1,540* 


3,640 


100* 


241 


Peanut -cotton 


122* 


163 


404* 


332 


1,820* 


4,000 


100* 


353 


Poultry : 


















New Jersey 


10* 


10 


590 


590 


8,840 


9,170 


100* 


160 


Corn Belt: 


















Hog -dairy 


155 


166 


507 


435 


4,690 


1,910 


69 


120 


Hog -beef cow 


181 


240 


328 


1,347 


3,540 


14,080 


70 


130 


Hog-steer 


178 


208 


425 


403 


6,280 


22,530 


71 


117 


Cash-grain 


209 


234 


380 


329 


4,910 


17,560 


69 


112 


Dairy farms: 


















Central northeast 


176 


217 


533 


433 


4,100 


16,200 


75 


163 


Eastern Wisconsin 


115 


133 


578 


435 


3,720 


15,410 


62 


146 


Southern Minnesota 


135 


156 


482 


393 


3,460 


15,030 


56 


136 


Tobacco: 


















Kentucky 


110 


118 


438 


391 


1,540 


5,390 


70 


171 


Coastal plain (large) 


170* 


170 


1,084* 


851 


6,630* 


7,830 


100* 


103 


Coastal plain (small) 


50* 


50 


381* 


320 


1,900* 


2,060 


100* 


100 


Wheat: 


















Northern plains (stock) 


497 


705 


340 


291 


3,420 


18,960 


51 


132 


Northern plains (corn) 


427 


506 


374 


388 


3,220 


21,940 


44 


134 


Southern plains 


586 


732 


272 


312 


2,860 


13,140 


57 


125 


Washington (pea) 


416 


555 


389 


349 


6,600 


29,270 


73 


135 


Ranches: 


















Northern plains (cattle) 


3,322 


4,240 


412 


388 


9,090 


26,260 


65 


118 


Inter mtn. (cattle) 


1,573 


1,725 


487 


499 


14,050 


45,310 


84 


127 


Southwest (cattle) 


8,316* 


11,090 


395 


337 


26,460 


28,100 


100 


133 


Northern plains (sheep) 


4,721 


6,298 


657 


805 


10,500 


35,380 


58 


112 



Source: Farm Costs and Returns, USDA Agr. Info. Bui. 176, Washington, D. C, Revised, 1959. 
*1947-49 (1937-41 not available). 

The rapid increase in commercial farm capital input is suggested 
in Table 7.2 for typical family -operated units. In addition to the in- 
crease in nonreal estate capital, the value of land investment has in- 
creased greatly because of (a) larger farms and (b) higher land values. 
The greatest change in capital structure has occurred on larger -than - 
family farms which have increased especially since 1940. While still a 
small portion of the total, the increase of these very large farms has 
been especially encouraged by trends toward greater specialization in 
production and the advent of machines and equipment of greater ca- 
pacity requiring larger initial investments and offering scale econo- 
mies through larger output. 

In many regions, land has been especially important in increasing 
individual farm capital needs because of the expansion in farm size and 
the continued increase in land values. Under important cost economies 
associated with modern machinery, the marginal net value returns from 
acreage added to an existing unit is greater than the return from the 



128 EARL O. HEADY 

original unit or acreage itself. This is typically true on family farms 
where (1) a surplus capacity in labor and machinery exists, (2) total 
fixed costs of this machinery and power must be covered in the original 
unit and are no greater when acreage is added, and (3) the only added 
expense, aside from investment in land, of the acreage increment is the 
direct variable costs. Hence, with a higher net product from added 
acres, the "expanding farmer" finds that the added acres have more net 
value to him than his original acreage, which results in a greater de- 
mand for land. This, along with the advent of recent machine tech- 
nology and a general inflation, has caused a significant increase in land 
values. However, the price of land has not increased as fast relatively 
as the prices of certain other major inputs and farm products over the 
past several decades. Hence, farmers have been encouraged to use 
more of this resource because of relative price ratios. 



Relative Change in Structure — the Farm and the Industry 

The change in resource structure of individual farms relative to 
that of the industry also has been great. Typically, individual farms 
have increased their total resource inputs since 1940, but the input of 
capital assets has increased appreciably relative to that of labor . ( While 
labor inputs for the industry declined almost a third between the pe- 
riods 1930-39 and 1950-58, labor input per farm declined only about 
10 percent. 1 Although industry experienced no important change in the 
acreage of cropland, input per farm increased 40 percent during this 
period.; 

The indices of selected categories of inputs presented in Table 7.3 
further emphasize differences in change of resource structure between 
the industry and the individual farm. Aggregate inputs of the industry 
increased only 10 percent over the 20 -year period, 1930-39 through 
1950-58. While the increase in such forms of capital as fertilizer, 
machinery, and livestock was large, the decline in labor inputs and the 
relative constancy of the large input represented by land tempered the 
aggregate increase /> But, again, because of the decrease in number of 
farms, especially small farms, total inputs per farm increased 60 per- 
cent in this period. Real estate input per farm increased 63 percent by 
1958, while the increase for the industry was only 12 percent. On the 
average, per farm use of inputs such as fertilizer, machinery, feed, 
and livestock services increased twice as much as industry use of 
these same inputs .^Between the periods 1930-39 and 1950-58, per farm 
use of purchased inputs increased 138 percent, whereas the comparable 
figure for industry was only 60 percent^ (The index of nonpurchased in- 
puts, mainly labor, declined 31 percent for the industry, but only 5 per- 
cent for the average farm^ 



1 The per farm figures are tempered somewhat by the fact that decline in number has 
been greatest among the size groups securing the smallest amount of land and labor. 



TECHNICAL CHANGE AND FACTOR PRICE 129 



Table 7.3. Total U. S. Agricultural Inputs and Inputs Per Farm 
for Selected Resources and Periods 





Aggregate U. 
1930- 1940- 


S. (millions) 
1950- 1959 


Average per farm 




1930- 


1940- 


1950- 


1959 


Item 


1939 


1949 


1958 




1939 


1949 


1958 




Cropland (acre) 


477 


470 


472 


470 


71.2 


78.2 


92.6 


102.2 


All land in farms (acre) 


919 


1005 


1042 


1045 


137.2 


167.5 


204.3 


227.2 


Workers (number) 


12.3 


10.4 


8.5 


7.4 


1.8 


1.7 


1.7 


1.6 


Man-hours used (hr.) a 


21.7 


18.9 


13.0 


11 ' 1 h 


3239 


3150 


2549 


2413^ 
160 b 
163 b 


Aggregate inputs 


100 


109 


111 


110 b 


100 


122 


146 


Farm real estate 


100 


103 


112 


112 b 


100 


115 


147 


Machinery and equipment 


100 


156 


266 


274 b 
536 b 


100 


174 


376 


399 b 
780 b 


Fertilizer and lime 


100 


248 


474 


100 


278 


624 


Feed, seed and livestock 


















services 


100 


205 


313 


381 b 


100 


229 


412 


555 b 


Paid inputs 


100 


133 


160 


167 b 


100 


149 


238 


243 b 


Unpaid inputs 


100 


86 


71 


65 b 


100 


96 


94 


95 b 



Source: Economic Report of the President, Washington, D. C, 1960, pp. 104-5. 

a Billions for the United States. 

b 1958. 

c Index. 

Quite obviously, then, the developing resource, capital, and financial 
structure of agriculture is not that of the firm in the industry. The 
trends of 1940 to 1959 will certainly continue for the next two decades, 
and at an increased rate if relatively full employment and ample em- 
ployment opportunities are maintained. Continuance of these conditions 
and increased communication among farm and urban communities will 
speed up the tempo of occupational and spatial migration, thus provid- 
ing the opportunity for remaining farms to expand in land input and total 
capital assets. New technology for agriculture will certainly encourage 
these trends. But even in the absence of new technology, the full ad- 
justment potential growing out of currently known technology and exist- 
ing resource prices will directly carry typical farms in the direction 
emphasized by the data in Table 7.3. Hence,\$he problem of the indi- 
vidual farmer in supplying his capital needs will mdood be greater than 
the problem of credit institutions in supplying credit for the agricul- 
tural industry. ^ 



Trends by Farm Types and Location 

Trends in use of more resources per farm are universal over the 
United States. The data in Table 7.2 indicate that typical commercial 
family farms in various regions used considerably more land and capi- 
tal, but somewhat less labor in 1958, as compared with the period 
1937-41. In most cases, reduction in individual farm labor input on 
these commercial units was much less than for the agricultural in- 
dustry. On the average, the increase in nonreal estate capital used for 



130 EARL O. HEADY 

these typical farms was greater than the national aggregate. The in- 
crease in acreage was, of course, much larger than for the industry. 

However, the situation varied considerably among types of farms 
and regions. In general the increase in individual farm use of nonreal 
estate capital was lower for cotton and tobacco farms in the South than 
for the Corn Belt and Great Plains farms and ranches. Similarly, typi- 
cal dairy farms also increased use of nonreal estate capital by a 
greater proportion than southern cotton and tobacco farms. However, 
the cotton farms in the Southeast decreased labor inputs by a larger 
proportion than other types of farms over the nation. 

While the increase in capital and land inputs per farm has not been 
so rapid for farms in the Southeast since 1940, the rate of change may 
well catch up between 1960 and 1980. Change has been slower in the 
Southeast because of (1) lower wage rates tending to discourage the 
substitution of high capacity machinery for labor, (2) the relatively less 
favorable initial capital position of farmers, (3) poorer school facilities 
and lack of communication for occupational migration and improved 
farm management (Chapters 22 and 23), and (4) the tendency of many 
abandoned farms to move into forestry rather than into the farm con- 
solidation process. If national economic growth continues at a rapid 
rate, with relatively greater tempo in the Southeast than in the Midwest 
and Great Plains areas, factor prices will encourage a more rapid sub- 
stitution of capital for labor. Economic stability and favorable incomes 
also can encourage a more rapid rate of farm consolidation and en- 
largement in the future than in the past. However, the rate of increase 
in land and capital inputs needed per farm must be much more rapid 
and of greater relative magnitude if the income gap between the South- 
east and (a) nonfarm employment and (b) farming elsewhere in the na- 
tion is to be closed. The changes needed are large if returns on labor 
resources especially are to be brought to levels which Americans would 
currently term "decent" (cf. Chapter 4). While the economic environ- 
ment will allow these adjustments in the Southeast to be more rapid in 
the future, lack of capital still stands as a major obstacle to needed in- 
creases in land and capital inputs per farm (cf. Chapters 5 and 14). 

American society is investing greatly in the economic development 
of agriculture in other nations where technology is backward and pro- 
ductivity of cultivators is low. This type of investment is good for hu- 
manitarian and related reasons. Capital and managerial ability are the 
scarce resources in these segments of society, and they must be ex- 
tended. However, we should muster our national pride and, through 
proper public mechanisms, provide means of getting the necessary 
capital and other resources to individual farm units in the Southeast. 
The gap between agricultural technology and productivity of farm labor 
in this area, as compared with other farming regions of the United 
States, is comparatively as great as that among nations if we weigh the 
present Southeast situation within a society (and not separated by thou- 
sands of miles of water or attached to an undeveloped economy) where 
affluency in living standards and income is greater than in any other 
nation. 



TECHNICAL CHANGE AND FACTOR PRICE 131 

Product and Resource Prices 

( From 1950 to 1959, total agricultural output increased faster than 
growth in the market. Farm commodity prices were depressed enough 
to more than offset inflation and the rise in the general price level?| 
L While commodity prices declined, prices of all inputs increased and 
farm profits in agriculture declined in those 10 years.' 4 Jn response to 
this price and income complex, plus the relatively favorable returns to 
land and transfer of labor to nonfarm uses, capital inputs increased, 
with land declining slightly and labor declining greatly for the industry 
as a whole T Yet the typical agricultural fi rm increased the total value 
of inputs as the increase in capital and land submerged the slight de- 
cline in labor .'^.t first glance it would appear that m arket forces , the 
prices of commodities relative to the prices of resources particularly, 
would cause the industry and firm to move in the same direction A Or, 
( '^with scale economies associated with new technology not fully exploited 
by individual firms, contrasting trends might be expected between the 
two.) Yet, (other forces bearing on the quantity and mix Of res ources 
used by the agricultural firm have resulted in adjustment of the in- 
dustry in opposite directions^ The remainder of this chapter is con- 
cerned with (1) interpreting these forces, and (2) translating their pos- 
sible effects into capital and credit needs of individual farmers. 



factors related to expansion of inputs 

and capital assets of the farm 

relative to the industry 

The question arises at this point as to why individual farmers use 
much more capital assets— the several types of resources representing 
new technology and land— when prices of products are on the depressed 
side and the industry as a whole has made large reductions in labor in- 
puts, small reductions in land inputs, and only modest increases in 
physical capital or nonland input. The major explanations are: (1) the 
financial or equity position of farmers in postwar periods and their 
greater ability to purchase resources and cope with the risks and un- 
certainties surrounding greater use of purchased inputs; (2) the nature 
of scale returns, the cost advantages of larger size and volume, at- 
tached to new technology; and (3) the prices of resources representing 
new technology relative to each other and relative to the substitutability 
and productivity of these factors. 



The Asset or Financial Position 

( 

N Farmers in general have not used resources and assets to the ex- 
tent postulated in static economic theory: , Under static conditions they 
would use labor and land in their various quantities and the many capital 



132 EARL O. HEADY 

items representing various technologies to the point where the marginal 
productivity of each resource item would be equal to the price ratio 
formed by dividing the price of each resource by the price of the prod- 
uct which it produces. Historically, farmers have financed their oper- 
ations on an equity basis (cf. Chapter 12). Given their owned assets, on 
which credit is supported, they have been limited in purchased assets 
or resources by (1) amounts of credit loaning firms would provide them, 
or (2) restraints in credit growing out of their own risk aversions. Ele- 
ments of these limitations on capital and resource use are discussed in 
detail in Parts HI and IV. Consequently, except in periods of price re- 
cession when commodity prices have fallen sharply relative to the 
prices or costs of resources, the static equilibrium condition of "re- 
source used until marginal productivity falls to the price ratio" has not 
generally prevailed. The productivity has exceeded the price ratio, 
particularly for capital items. However, with a growth in income and 
savings during prosperous periods for the farm industry— such as 
1940-54— the individual farm entrepreneur has both (1) more funds with 
which to purchase capital items and the services of resources generally 
and (2) a larger equity base for borrowing funds and increasing use of 
capital or other resources. 

Inflation also provided a capital gain which increased equity for 
purchasing added resources (including credit) as indicated in Table 7.4. 
While farmers on the average held debts at a lower level relative to 
assets in postwar periods, they had a much greater absolute asset base 
on which to borrow. Given encouragement for large units and greater 
resource employment from other forces, the credit base would appear 
to exist for further extension in individual farm use of resources. Of 
course, an important portion of this credit base will disappear as farm 
operators retire. This is the group which especially benefited from an 
appreciation in asset values, or capital gains, from general inflation. 
Much of this type of capital gain will not exist for beginning operators 
who must buy farms, except as they operate under family partnerships 
and related arrangements. 



Industry and Farm Differences Under Capital Limitations 
and Profit Depression 

We now illustrate how an individual farmer who can acquire needed 
resources because of capital gains through inflation or larger income 
and savings can profit by increasing resources while prices and returns 
to the industry in total decline. 2 To do so, we resort to some simple 
algebra assuming a single product, a given demand situation, and two 
resources used in production. The demand equation is (1), where the 
price elasticity, b, is less than 1.0. 



2 He may also acquire more resources through integration or other new credit insti- 
tutions (cf. Chapter 8). 



TECHNICAL CHANGE AND FACTOR PRICE 



133 



Table 7.4. Changes in Asset and Debt Structure, U. S. Agriculture, 1940-59 





Value of 

farm assets 

(current 






Value of physical assets 




Farm 


Debt as 
percent 




(1947-49 dollars) 






Real 


Non -real 




Year 


dollars) 


debt 


of assets 


estate 


estate 


Total 




(billion dollars) 


(percent) 




(billion dollars) 




1940 


53.0 


9.6 


18.1 








1941 


55.1 


9.8 


17.8 








1942 


62.5 


9.9 


15.8 








1943 


73.3 


9.2 


12.6 








1944 


83.8 


8.3 


9.9 








1945 


93.1 


7.6 


8.2 








1946 


102.0 


7.7 


7.5 








1947 


113.9 


8.4 


7.4 


72.4 


27.5 


99.9 


1948 


125.2 


9.2 


7.3 


73.2 


26.9 


100.1 


1949 


132.1 


10.2 


7.7 


74.0 


31.1 


105.1 


1950 


130.8 


10.8 


8.3 


74.8 


32.2 


107.4 


1951 


149.6 


12.3 


8.2 


75.5 


33.7 


109.2 


1952 


165.6 


14.0 


8.5 


76.1 


35.0 


111.1 


1953 


162.9 


14.9 


9.1 


76.8 


36.0 


112.8 


1954 


159.7 


14.8 


9.3 


77.5 


37.4 


114.9 


1955 


164.7 


15.6 


9.5 


78.0 


38.1 


116.1 


1956 


168.3 


17.0 


10.1 


78.4 


38.1 


116.5 


1957 


176.4 


17.9 


10.1 


78.8 


36.7 


115.5 


1958 


186.4 


19.0 


10.2 


79.2 


37.9 


116.1 


1959 


203.1 


20.8 


10.2 


79.4 


39.7 


119.1 


1960 















Source: Agricultural Outlook Charts, USDA, Washington, D. C, 1960. 



(1) 



Qd = ap 



In this function, Q d is quantity, a is a constant to reflect other parame- 
ters (population, income, etc.), while p is price of the commodity. The 
individual farm's production function is 



(2) 



Q f = cX r Z s 



where 



Qf is the quantity produced, c is an expression of the level of technol- 
ogy, X and Z are magnitudes of inputs of two factors, while r and s 
are the production coefficients or elasticities. 3 Both r and s are as- 
sumed to be less than 1.0, but their sum is not necessarily so. There 
are n farms, and the industry production function is (3). 



(3) 



Qn 



ncX r Z s 



3 In order to retain simplicity, no attempt is made to introduce added variables into the 
production function to represent new technology. While this would be realistic, it simply 
''same general direction" illustrated without this step. 



adds to the *t 



134 EARL O. HEADY 

The power function is used to keep the illustration simple and man- 
ageable. While it is known that farmers are price responsive, it is as- 
sumed that output is limited to the resources used in two periods and 
that farmers can use more in the second period because of acquisition 
through savings or a greater credit base. 

Market demand and supply are equal for the industry under the con- 
ditions of (4). Price, then, is that of (5). 

(4) ncX r Z s = ap" b 



(5) P = Csrp") 



The total value product, TVP, equation under this ultra-short-run 
equilibrium is (6). 



B ■ . a m 



(6) TVP = pncX r Z s = ( ncX r z s ) ncX r Z s = 



n c X Z 



TVP will decline with the magnitudes of inputs and outputs under the in 
elastic demand situation. 4 From (6), the equations of marginal value 
productivity for the industry in (7) and (8) are derived. 

, 7 v 5 (TVP) zva^ 

(7) 5X " nVx"^ 6 



(8) ^™ 



Z n w c w X v Z e_1 

Obviously, from (6), (7), and (8), if the industry of farmers increases 
inputs and outputs, net revenue will decline (marginal value productivi- 
ties are negative) if the resources have prices of zero or greater. If 
non-zero and positive prices of p x and p z for the two resources are as 
sumed, this is still true for the industry but the outcome for the indi- 
vidual farm operator is different. Let us suppose, as originally, that 
equity financing and risk aversion or credit rationing has restrained 
his purchase of resources to such an extent that their marginal prod- 
ucts are greater than the two price ratios ^— and **— . Many experi- 

Px Pz 

mental production function studies, linear programming, budgeting 



4 In deriving (6), the price, p, is substituted from (5) into the total value function. Since 
b is less than 1.0, -r- = m is greater than 1.0. The exponent of n and c is 1 - m = w, a nega- 
tive quantity in the numerator since m is greater than 1.0. The exponents for X and Z are, 
respectively, r(l-m) = v, s(l-m) = c, and are both negative, when expressed in the numerator, 
because m is greater than 1 and 1-m = w is negative. 



TECHNICAL CHANGE AND FACTOR PRICE 135 

analyses, and farm record summaries show that the marginal returns 
on individual classes of resources have been much greater than their 
costs to individual farmers in postwar years. Even during the period 
of decline in feed grain prices, Iowa studies show that the return from 
fertilizer, at the rate farmers typically were using this resource, was 
over twice the cost of this resource. The same situation will be found 
elsewhere over the nation if economic analysis is applied to fertilizer 
response data. 

Because of its atomistic nature, the demand for the product of the 
individual farm is infinite at a constant product price of p. Hence, the 
total value product for the individual farmers is that in (9) while the 
marginal value products of resources are those in (10) and (11). 

(9) TVP = pcX r Z s 



(10) t2?p - rpcX^Z 



(id i|m= 8pcX - z - 

The total value product and the marginal value productivities for the in- 
dividual are not necessarily negative from the outset, as they are for 
the industry. Given a sufficient degree of capital limitations, the quan- 
tities in (10) and (11) will be larger than p x and p z , the factor prices, 
for the individual farmer. If excess of income over expenditures and 
capital appreciation due to inflation provide an individual farmer with 
added funds or credit base for purchasing resources beyond the original 
restraint levels, he can profitably add resources, with the industry do- 
ing likewise, but with price and aggregate net income declining as long 
as the quantities in (10) and (11) are greater than p x and p z , respec- 
tively. This condition does not hold for the industry because, even with 
a zero price for resources, net return would decline and marginal value 
productivities would be negative. 

For an important portion of the period following 1940, farmers used 
a big part of their increased incomes to pay off debts. But even so, in- 
dividual farmers still had savings for purchase of more resources. 
Also, a smaller percentage debt on greater total assets still allowed a 
greater dollar or absolute amount of borrowing. While total inputs of 
the agricultural industry increased only modestly over the period 
1940-59 under these conditions, individual farm use of resources rose 
sharply. This differential change was possible because farmers re- 
maining in the industry were in an advantageous resource purchasing 
position. They were able to acquire some resources formerly con- 
trolled by persons less well situated economically who migrated to im- 
prove their income position. Also, more resources in total were used 
because price conditions were favorable. 

In the foregoing analysis, only one relationship was examined, viz., 



136 EARL O. HEADY 

the use of more resources by individual farmers in a depressed in- 
dustry, without regard to ranges of increasing scale returns. The pur- 
pose was to illustrate that in an industry where greater inputs and out- 
puts cause aggregate income to decline, individual farmers, previously 
limited in resource quantity by capital limitations, can still purchase 
more inputs and increase income. But to do so, they must increase 
their output by a larger percentage than the decline in price, and/or at- 
tain certain other cost economies. Farmers who cannot do so are con- 
fronted with depressed incomes and with the alternatives of (1) increas- 
ing resources used (if they can do so with marginal value productivity 
of the resources remaining above the price per unit of the resources) 
or (2) leaving agriculture. Many have followed the latter course. 

Industry net farm income has declined even while industry inputs 
were increasing (Table 7.5). Since there are fewer farms, average in- 
come per farm has not fallen by as great a percentage. Even then, in- 
come differs greatly among farms. Individual farmers who increased 
inputs by the largest proportions and changed to profitable new tech- 
nologies have partly offset the decline in prices by greater volume and 
lower unit costs. Some have increased their income while average in- 
come per farm declined. Other farmers have experienced a sharp de- 
cline in income because capital and other forces have restrained their 
use of more resources and new technologies. 



Scale Returns and Cost Economies 

Generally, the opportunity for individual farmers to increase their 
use of resources, expand output, and increase profits (or keep profits 
from declining when returns to the industry are depressed from greater 
output) rests on (1) increasing scale returns or cost economies associ- 
ated with the prevailing or potential technology, and/or (2) the relation 
of input prices to product prices. The first consideration will be dis- 
cussed, although the two are not unrelated. 

On -the -farm scale returns or cost economies arise mainly from 
mechanical innovations such as those relating to power, machinery, 
equipment, and buildings. They are only slightly, or not at all, related 
to such biological innovations as new seed varieties, fertilizer, insecti- 
cides, and chemicals. Power units, field machines and harvesters of 
greater capacity, and larger crop -handling equipment have particularly 
increased the size or acreage range over which declining per unit costs 
prevail in cotton, corn, wheat, and other field crops. Also, the greater 
capacity and productivity of these machines has substantially increased 
the number of acres, animals, and birds which can be handled by one 
man or the farm family. Since the fixed costs of these high -capacity 
machines are greater than those of machines used prior to World 
War n, the curve of per unit costs declines more sharply over larger 
outputs. A greater gain in net returns per unit is thus realized as size 
increases. For the same reason, the economic disadvantage applies 



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138 EARL O. HEADY 

more acutely to farms of small acreage. In days of horse power, the 
important cost economies had been attained by the typical 160 -acre 
Corn Belt farm. Based on the machine technology prevailing in the * 
Corn Belt during the early postwar period, however, studies showed 
that per acre and per unit costs of production declined quite sharply up 
to 240 crop acres. 5 Costs per unit declined beyond this point, but the 
rate of decline was much less and probably insufficient to overcome un- 
certainty and related investment phenomena in conditioning choices in 
farm size. 6 In a later study, cost functions were analyzed for later 
types of power units and machines, including picker -shellers. 7 With 
the great capacity and costs of power units and field machines, we find 
that the rate of decline in per unit (acre) costs of crop production is as 
great at 320 acres as it was at 240 acres in former studies. To an im- 
portant extent, this same relative change in cost functions has been tak- 
ing place in other geographic regions and for other agricultural prod- 
ucts. It is true for the tractor (as compared with the mule) technology 
of cotton production in the Southeast, and particularly for cotton and 
vegetable production in the West, where the capacity and purchase price 
of machines has increased but the marginal rate of substitution of ma- 
chinery for labor has increased even more. It is also true in wheat 
production where larger power units and machines have extended the 
acreage over which the rate of decline in per acre costs is large. 
Newer building facilities, feed, and milk -handling equipment have had 
a similar effect in extending the scale over which costs decline in 
dairying. Newly developed techniques of housing and feed handling in 
pork, poultry, and beef production appear to have a similar effect in 
giving rise to a cost curve which declines over a greater number of 
animals and birds. 

These developing machine technologies increase the demand for, or 
use of, several types of capital. First, the investment in machinery 
and equipment itself is increased. But since the main cost advantages 
of these newer machines are realized only if their higher fixed costs 
are spread over more acres or animals, the latter categories of capital 
must be increased and the investment is augmented accordingly. In 
numerous types of production, investment in the added land or livestock 
inputs is greater than the increase in machine investment. For ex- 
ample, an increase from 160 to 240 acres, or from 200 acres to 320 
acres, in north central Iowa or central Illinois can result in the use of 
an added $30,000 in land, an amount greater than the incremental ma- 
chine investment for handling the larger acreage. The same general 



5 Earl O. Heady, Dean McKee, and C. B. Haver, Farm Size Adjustments in Iowa and Cost 
Economies in Crop Production for Farms of Different Sizes, Iowa Agr. Exp. Sta. Bui. 428, 
May, 1955. 

6 On an acreage basis (but not necessarily on a per unit of product basis), per unit costs 
decline and approach the mathematical limit of the variable costs, V, per acre as denoted in 
the equation A = FN -1 + V where A is average cost per acre, F is total fixed cost, and N is 
the number of acres. 

7 Ronald Dean Krenz, Farm Size and Costs in Relation to Farm Machinery Technology, 
unpublished Ph.D. thesis, Iowa State Univ., Ames, Iowa, 1959. 



TECHNICAL CHANGE AND FACTOR PRICE 139 

relationship is also true for shifting from a conventional cattle feeding 
operation to a highly specialized one with more animals, or in enlarging 
a dairy herd to realize lower costs associated with recent developments 
in housing and feed and milk handling. 

However, increase in scale is not determined alone by fixed costs 
and the rate and extent of decline in unit costs associated with changing 
machine technology. It depends also upon (1) relative changes in the 
marginal rate of substitution between machine capital and labor, and 
(2) the relative prices of these two categories of input. Unless relative 
changes in these two magnitudes were favorable to shifts in resource 
inputs and structure of the type mentioned previously, the basis of agri- 
cultural production would remain more in the direction of labor with 
less economic premium on larger units and greater investment. The 
rate at which machine capital substitutes for labor, relative to the unit 
price of services of these two factors, does increase with scale of 
operations under the range of machine types and sizes available and in 
prospect. 8 This increase in substitution rate itself causes more ma- 
chinery to be substituted for labor in the aggregate in agriculture, with 
investment in inputs increasing accordingly. 

If humans were capital assets, as they were in days of older insti- 
tutions, the substitution of machinery for labor would cause an invest- 
ment to increase less rapidly than is the case. A laborer is not an 
asset which can be purchased or sold in the market. Only the services 
of the laborer in a particular period can be purchased. In contrast, 
however, a machine is a capital asset. Its entire stock of service is 
purchased in the price of the asset. For this reason, as machine capi- 
tal is substituted for labor, capital investment increases by a greater 
proportion than costs are reduced in a single production period. 

These several considerations relating to machine technology will 
cause capital requirements of the individual farm to continue to grow in 
the 1960-69 decade. In the Corn Belt, for example, the most predomi- 
nant size of farm is 160 acres, a size smaller than necessary for full 
realization of cost economies. This situation is paralleled in wheat 
areas and other regions. Capital per farm will be increased as much 
by investment in the added acres, animals, and birds to complement 
newer machine technology as in the machines per se. Also, there will 
be continued economic pressure for the individual farm family to either 
(1) cease farming operations or (2) expand scale to realize incomes 
comparable with wage earners and businesses in the nonfarm sector. 
With continued economic growth and relative premiums on product 
prices and resource returns in nonfood sectors of the economy, the 
small farm with a low capital investment will continue to disappear (cf . 
Chapters 1 and 14). The operator will shift to nonfarm employment 
where returns to his labor resources are greater than returns from 
farming, or he will remain in agriculture but will extend his investment 



Earl O. Heady, Economics of Agricultural Production and Resource Use, Prentice Hall, 
New York, N. Y., 1952, p. 192. 



140 EARL O. HEADY 

and output to reduce unit costs and increase the rate of return to his 
resources. This shift is, of course, taking place. It will continue at a 
somewhat gradual rate with no extreme revolution in farm size and 
numbers within a particular period— such as a year. 



FACTOR PRICES AND SUBSTITUTION RATES 

One relationship between new machine technology and increased 
capital demand by the individual farm is reflected in the farm's cost 
curve or structure. However, the magnitude of machine prices relative 
to the prices of other resources and to farm products is an important 
causal factor determining the amount of this specific form of capital 
which is used in agriculture. Relative changes in the rate of substitu- 
tion of machinery for other resources also are important in this re- 
spect. Rather than discuss machinery alone within this framework, at- 
tention is directed toward capital resources in general. Resources 
such as fertilizer, feed additives, improved seeds, and others have been 
used in increased quantities mainly because they have been priced fa- 
vorably relative to the prices of farm products, and because their mar- 
ginal productivities have increased as a result of technological changes. 
Within this favorable environment, scale or cost economies have had 
little, if any, relationship to increased demand for such "biological" re- 
sources. 

For the individual farm, capital items such as fertilizer, insecti- 
cides, fuel, seeds, etc., serve generally as complements with land. As 
more acres are operated, additional quantities of the capital items also 
are used. Similarly, as the number of animals and birds handled in- 
creases, the amount of feed and livestock services also increases. 
Technically, of course, other capital inputs can serve as substitutes for 
land and livestock, even for an individual farmer. He can produce a 
given output, for example, with more fertilizer and less land or vice 
versa. But in general practice and because of favorable price relation- 
ships, he either uses more fertilizer and other chemicals or inputs on 
a given acreage or expands their use as he takes on a larger acreage. 
For the industry, however, fertilizer and similar materials serve more 
clearly as a substitute for land. With the large increase in fertilizer, 
insecticides, improved seeds and products of other innovations, the 
nation's food output can now be produced with fewer acres devoted to 
the conventional mix of crops. Unfortunately, however, it has not been 
possible to withdraw or shift the excess land, and surpluses still ac- 
cumulate. But even if the national input of land were diminished to 
bring output into line with demand, individual farmers producing the 
particular commodity would not reduce output (in the absence of 
"across the board" control programs) but would continue to increase 
land and associated inputs as long as price and marginal productivities 
of these resources were favorable relative to the prices of the com- 
modities produced. 



TECHNICAL CHANGE AND FACTOR PRICE 141 

Table 7.6. Index of Prices Received and Prices Paid for Selected Inputs, 
1935-59 (1935-39=100) 









Period 






Index of 


1935-39 


1940-44 


1945-49 


1950-54 


1955-59 


Prices received by farmers 


100 


144 


231 


252 


221 


Price of fertilizer 


100 


106 


132 


150 


151 


Price of machinery 


100 


102 


130 


173 


191 


Price of labor 


100 


178 


333 


395 


455 


Price of land (alone) 


100 


112 


188 


254 


325 


Price paid, all costs 


100 


122 


184 


220 


229 



Source: Agricultural Outlook Charts, USDA, Washington, D. C, 1960. 

The prices of factors used in production and the physical magnitude 
of their marginal productivities have increased the demand by individual 
farmers for most major categories of inputs (Table 7.6). This was true 
even in the late 1950's, when commodity prices were depressed relative 
to factor prices, generally. If marginal productivities are increased 
sufficiently through technical innovations, the farmer's demand for in- 
puts can increase even under conditions of declining commodity prices 
relative to factor prices. 

Assuming that X represents the original quantity of the resource, 
X n is the new quantity, P y is the price of the product, and Pf is the 
price of the factor, nine possible combinations of changes result and 
are represented by the cells in Table 7.7. The rows represent changes 
in the magnitude of the factor/product price ratio, while the columns 
represent changes in magnitude of marginal physical productivity (MPP) 
of resources. Each cell indicates the expected change in factor demand 
by the individual farmer. For example, with the MPP and price ratio, 
Pf /P y , both constant, no change would be expected in factor demand 
(the middle cell of the table). Generally, the first column can be ruled 
out, except for situations such as extreme soil erosion. The middle 
column may apply to a few resources where technical innovation has 
been unimportant, e.g., more so for range resources in the Inter- 
Mountain region than for farm resources elsewhere in the nation. How- 
ever, the demand situation for most resources such as land, agricul- 
tural chemicals, machinery, livestock, and feed is characterized by the 
third column. The marginal productivities of the resources have in- 
creased due to technical research by the USDA, land -grant colleges, 

Table 7.7. Expected Effect of Changes in Price Ratios 
and Marginal Productivities on Resource Demand 





MPP decrease 


MPP constant 


MPP increase 


Pf/P v increase 


X n X 


x n x 


X n ? X 


Pf/Py constant 


x n x 


x n = x 


x n x 


Pf/Py decrease 


x n ? X 


x n x 


x n x 



142 EARL O. HEADY 

private firms, and farmer discovery and management. With the price 
ratio constant or decreasing, demand by individual farmers for the re- 
sources would increase. With the price ratio .increasing, demand for 
resources would be expected to increase or decrease depending on 
whether the improvement in productivity of the resource is relatively 
greater or less than the increase in the price ratio. Evidently, for in- 
dividual farmers in most regions of the country, the marginal physical 
productivities of resources have increased faster than the factor/ 
product price ratio has declined. 



STRUCTURAL CHANGE IN ASSETS 
DUE TO CHANGE IN FARM SIZE 

If the demand of individual farmers for land to expand size of farms 
continues to increase, further shifts may be experienced in the make-up 
of capital resources. Consolidation of farms may dampen the demand 
for nonreal estate capital, as the increase in demand for some forms of 
capital is partly or totally offset by decline in other forms. Further 
study and time are needed to determine the effect of consolidation, farm 
size increase, and the growth in demand for land by individual farmers 
on the composition of capital inputs. However, the general current pat- 
tern in major crop producing regions appears to be that farms of typi- 
cal size have underemployed capacity of labor, machinery, and power 
units. This is true largely because the discrete unit size in which ma- 
chines are purchased exceeds the capacity needed. As these farms take 
on additional land, they need not increase their machinery and power 
proportionately, and sometimes not at all. For instance, if two farms 
of 160 acres are consolidated, the total machinery investment may well 
be less than for two separate units. Or, more likely, the total invest- 
ment in power units and field machinery may be less than previously, 
while that for feed handling and similar equipment may increase. 

Studies of farm consolidation in Iowa show the following effects: 
Farmers supplying land for farm consolidation generally are those with 
greatest limitations in capital and, except for retirement and similar 
reasons, migrate from farming because incomes are unfavorable rela- 
tive to other opportunities. Using their restricted capital for machinery 
and operational expenses, they have invested relatively little in ferti- 
lizer, improved seed, and livestock. In contrast, those farmers acquir- 
ing land through farm consolidation have more capital. As they operate 
the acreage released by migrating farmers, they use more fertilizer 
per acre than the previous operator. Evidently, they also produce more 
livestock on the added unit with the result that livestock capital em- 
ployed on the consolidated unit exceeds that on the previous two sepa- 
rate units. 



TECHNICAL CHANGE AND FACTOR PRICE 143 

CAPITAL INSTITUTIONS IN RELATION TO 
THE FARM-FIRM CAPITAL DEMAND 

Given the existing and prospective techniques in agriculture and the 
relative prices of factors used in production, the individual farm's 
capital demand or requirement will grow greatly in future years. Even 
with some further decline in commodity prices relative to factor 
prices, this will be true because of (1) the larger acreage and animal 
numbers over which scale or cost economies of machinery and equip- 
ment extend, (2) the productivity of many resources, such as chemicals, 
is still high relative to their costs, and (3) because the suppliers of in- 
puts will increasingly find themselves faced with the need either to in- 
crease the productivity of the resource they sell to farmers or to lower 
its price. 9 Greater knowledge of farm people, better adaptation of vo- 
cational and other education to current economic conditions, and im- 
proved communication mechanisms for nonfarm employment opportuni- 
ties also will lead further to a greater average capital input per farm 
(cf. Chapter 23). Also, the tendency toward increased specialization in 
farm management, partly as a result of the more complicated technol- 
ogy of production, will favor a greater input and output per farm. 

Capital inputs or demand for the individual farm will continue to 
grow much more rapidly than those for the industry. Growth in indi- 
vidual farm use of capital may well allow returns to resources used in 
agriculture to compare more favorably with those employed in other in- 
dustries. But before this structural change is completed in magnitudes 
which appear necessary, important changes may be needed or required 
in the capital market and in credit mechanisms if they are acceptable 
to the American public (cf . Chapters 13 and 15). Obviously a farm unit 
using $200,000 or more in capital— an amount appearing consistent with 
the technology and scale economies now existing in major types of com- 
mercial agriculture— will have to surmount important financing prob- 
lems. Traditionally, the equity base for financing agriculture has come 
from within the industry, mainly from the families supplying labor to 
the sector. This situation is not paralleled in other industries where 
the supply of capital through corporate funds and common stocks is 
drawn widely from all sectors of the economy and not particularly from 
the households which supply labor. Typically, farm businesses have 
been initiated by the family providing the initial assets or credit back- 
ing to a son as he starts operations. Inheritances drawn from capital 
accumulation within agriculture have been the main source of the down 
payment in purchasing land. 

This source of equity base for credit is much less consistent with 
the technology and capital requirements of 1960 than with those of 1950. 
The growth of vertical integration in farming may stem as much from 



9 As farmers become even more proficient as managers, materials representing con- 
ventional techniques may rapidly come into full use. Further sales of materials will then 
depend especially upon the ability of supplying firms to produce new materials with a higher 
marginal productivity than the old, or which are priced lower relative to their productivity. 



144 EARL O. HEADY 

these developments as from other reasons sometimes mentioned, as 
presented in Chapter 8. But vertical integration is only one means of 
gearing institutional and market mechanisms more closely to the 
modern capital needs. Others need to be investigated. Family corpo- 
rations may offer promise. Perhaps the entire structure under which 
credit is provided to agriculture needs to be re-examined. Histori- 
cally, the farm operator has borrowed funds over and above his inherit- 
ance or individual capital accumulation to finance ownership. But he 
immediately established a goal of 100 percent equity and used his sav- 
ings for debt retirement. The goal underlying this procedure has been 
that of security for old age and retirement. The extension of social 
security coverage to farmers, the growing knowledge of farmers about 
nonfarm investments, and related developments may remove the pres- 
sure for rapid and complete debt retirement. As part of this process, 
we need to re-examine our credit facilities for agriculture, as is done 
in Part HI. The corporate firm makes no particular effort to liquidate 
its indebtedness on an amortized basis. Should more credit be extended 
to agriculture in a similar manner? Farm operators might then utilize 
their savings where appropriate to extend operations to a scale more 
consistent with modern technology. Both farm businesses and lending 
firms may gain, provided the initial loans have an economically sub- 
stantial base. In the absence of major business recessions and in a 
stable agriculture, borrowed capital should have no less productivity in 
the future than in 1959. Why should debt be liquidated if the funds so 
obtained have a productivity greater than their price? These consider- 
ations and related questions need to be examined as we study how indi- 
vidual farms can be better supplied with credit to aid them in bridging 
the transition from the current structure of agriculture to the one 
which is in prospect. 

Finally, if young farmers are to be given better opportunity for 
starting, or if established operators are to use the various capital re- 
sources, in line with relative prices and productivity, consideration 
needs to be given methods for extending credit on the basis of capital 
productivity. Diesslin also argues for this consideration in Chapter 13. 
Credit on this basis would allow a use of resources more suited to the 
modern economic structure than to the more conventional security 
basis. Of course, risks to the lending firm are no less important than 
risk and uncertainty to the farm firm. However, integrating firms have 
partly overcome this difficulty by combining management aids or speci- 
fications with capital supply. A parallel development is appropriate 
for other credit institutions and firms. 



Discussion 

JOHN BLACKMORE * 

Heady' s central thesis is that with a continuation of 1959 trends in 
agriculture, individual farm demands for capital will grow substantially 
more than the aggregate demands for capital on the part of the agricul- 
tural industry, and that this in turn will create a need for some new 
kinds of financial structures for farm business and a new orientation 
for farm lending. 

A special commendation is due Professor Heady for his useful ad- 
dition to the prevailing explanation of adoption of innovations. The so- 
ciologists have monopolized the field, and it is helpful to have it pointed 
out that the ultimate test of acceptance of an innovation is economic in 
nature. I would expect both the remote Asian farmers and the sophisti- 
cated Iowa producer to make some analysis of the economic conse- 
quences for the firm as a whole regarding the adoption of an innovation 
as well as an estimation of the adjustments required in the total process 
of production, and their costs, output, and income potentials. The lack 
of knowledge as to how to conduct such a whole -farm economic analysis 
may well be a major factor in delaying adoption of innovations in farm- 
ing. 

Attention is called to agricultural economists regarding their per- 
sistent oversight of the role of fertilizers in modern farming. Heady 
has done far better than most. Chapter 7 contains significant data re- 
lating to this highly strategic element in the agricultural production 
process. Why are farm economists and agricultural policymakers so 
preoccupied with the land factor? The sponsors of this symposium 
have shown great wisdom in attempting to turn attention to the capital 
factors in agriculture, and Heady' s chapter contains many inferences 
that fertilizers, among all the forms of capital, should have some spe- 
cial attention. Note in Table 7.3 the relative changes in input use. Fer- 
tilizers are conspicuously ahead of alternate investments. The price 
indices presented in Table 7.6 suggest why farmers may have acceler- 
ated fertilizer use. Note also Heady 's reference to Iowa studies show- 
ing that returns to fertilizers were, in typical farm situations, more 
than double their costs. One might wonder if farmers have not been 
substantially ahead of their economic advisors here. 

In his analysis, Heady makes a special plea for intensifying public 
efforts to aid in the accelerated redevelopment of farming in the South- 
east. He suggests that this region can catch up with the Middle West in 
the two decades of 1960-79. I do not agree. The process is not one of 
"catching up" with any other region of the United States. It is one of 
developing a unique and productive system of farming consistent with 
the physical and economic environment of the particular section of the 



*Head, Department of Agricultural Economics, University of Massachusetts. 

145 



146 EARL O. HEADY 

nation. We should not look especially to the Middle West for a model 
of the agricultural future for the Southeast. We should, on the other 
hand, recognize that most of the farms in this area simply have no fu- 
ture as they are now organized. For hints about what the future will 
look like, this region should examine what has happened over a period 
of almost one hundred years in New England and what is happening now 
in Sweden. As in those areas, much land in the Southeast is going back 
into forestry. Only the most productive soil areas can be expected to 
remain in agricultural production. In western Massachusetts the rich 
Connecticut Valley remains in highly productive farms, while in the 
Berkshires the old stone field fences run through the forest. In 1880, 
40 percent of the area of Massachusetts was in improved farm land. In 
1959 10 percent is in such use. In New England it was cheap energy 
and water power that sparked industrial development which in turn has 
concentrated the human population largely in urban areas. People 
moved west or moved to town from the hill areas. Cheap energy of 
another kind is having the same effect in the southeastern region. The 
growth of the cities and of industry is accompanied by the evolution of 
a whole new pattern of agriculture. I expect that the surviving com- 
mercial farms in the Southeast will be larger and more highly special- 
ized operations making use of large amounts of capital. There is a 
higher income future for the Southeast. Its main elements will be in- 
dustry, forests, and large, specialized, heavily capitalized farms. 



Chapter 8 

LAWRENCE A. JONES 

RONALD L. MIGHELL 

Agricultural Research 
Service, USDA 



Vertical Integration As 
a Source of Capital 
in Farming 



LENDERS, trade creditors, landlords, partners, and farm operators 
are the traditional sources of capital used in farming. But we have 
come to recognize another significant source— business concerns 
vertically integrated with farm operations. Through vertical arrange- 
ments, suppliers, processors, and dealers have put much new capital to 
work in farming. This, in turn, has stimulated an increase in capital 
from traditional sources. This chapter is concerned with an examina- 
tion of this relatively new means of expanding farm capital, how it came 
about and its implications. 



DEFINITIONS 

In this chapter farm capital is defined broadly to include all the 
financial resources and all the goods and services used in farming ex- 
cept the labor of the operator and his family (Spitze and Raup's defini- 
tions in Chapters 2 and 9). Land, buildings, machinery, livestock, sup- 
plies, services, and the funds used to buy or hire any of the goods and 
services used in farm production are considered to be farm capital. 

Vertical integration also is a term that is subject to various inter- 
pretations, partly because it does not fit in well with an outmoded rela- 
tively simplified concept of economic organization. As used in this 
chapter, vertical integration means the joining together of two or more 
stages in the vertical chain of production under some form of unified 
or shared management. 



FORMS OF VERTICAL INTEGRATION 

In the Southeast, vertical integration in agriculture has developed in 
a variety of forms. In some instances, individuals or corporations co- 
ordinate production and processing by owning both farms and processing 
plants, shade tobacco in Georgia and Florida, sugar cane in Florida, 
cotton in Mississippi, and apples in Virginia. Cooperative activity as a 
way of integrating production and marketing is important in Florida 
citrus. Contracts are another means of tying farm production to sources 

147 



148 LAWRENCE A. JONES AND RONALD L. MIGHELL 

of supply or to marketing channels. Contracts have existed for some 
time in potatoes, aromatic tobacco, tung nuts, and certain vegetables. 
The most dramatic development of vertical integration has occurred in 
the broiler industry. The current contractual arrangements in egg and 
hog production in a few areas have been watched with much interest, 
since the implications are important. 

The various forms of vertical integration differ widely with respect 
to meeting risk, supplying capital, and controlling management in farm 
production. In this chapter the discussion is limited to contractual ar- 
rangements and how they affect the capital position of agriculture. 
Even among contracts, large differences are found among areas, com- 
modities, and producers. The conclusions herein are focused mainly 
on contract production of poultry and hogs in the Southeast. 



CONTRACTS AND CAPITAL EXPANSION 

Feed and fertilizer firms, hatcheries, canneries, and other sup- 
pliers and processors are among those who furnish capital to, and are 
integrated with, agriculture under contractual arrangements. These 
businesses, which may be private organizations or cooperative associa- 
tions of farmers, are usually called contractors or integrators. They 
provide a variety of operating capital including such items as feed, fer- 
tilizer, chicks, pigs, medicine, and equipment. They also furnish a va- 
riety of services ranging from general managerial guidance to such 
specific tasks as pruning, spraying, harvesting, and hauling. Often the 
contractor retains ownership of the capital he furnishes and becomes a 
joint enterpriser with, rather than a creditor of, the farmer. This is 
commonly termed "financing production. * The "producer" usually 
means the operator of the farm, and he may be either an owner or a 
tenant. However, at times the integrator is more likely to be the real 
producer — in both the economic and legal sense — if he owns much of 
the operating capital and exerts a considerable measure of entrepre- 
neurial control. 

The land, buildings, equipment, and labor used in contract produc- 
tion are usually provided by the farmer. He may also supply some of 
the operating capital. The relative amounts of the different resources 
supplied by the farmer vary with the commodity and the type of contract. 
If he needs credit for the items he furnishes, he may borrow from com- 
mercial banks, insurance companies, Federal Land Banks, production 
credit associations, or other usual sources. Sometimes a contractor 
helps a farmer arrange for his credit needs. 

Integrators in the Southeast provide substantial financing in some 
instances. 1 A broiler contract, for example, might provide for $18,000 
worth of feed, chicks, medicine, fuel, litter, and other supplies each 



x The estimates of costs used in this section are approximations based on information 
from published and unpublished sources. 



VERTICAL INTEGRATION 149 

year in a typical operation of four lots of 10,000 birds each. For a 
2,000-bird laying flock, the contractor's advances in pullets, feed, and 
supplies would come to more than $12,500 a year. The integrator's 
stake in breeding stock for a 24- sow- and- boar contract would amount 
to about $1,700. Frequently, he also provides corn and supplement 
worth $6,000 or more annually. 

For the farmer, investments needed to meet the contract require- 
ments may include new or remodeled buildings, machinery and equip- 
ment, and some of the operating expenses. Cash costs for constructing 
buildings may be considerably less than the investment value because 
farmers frequently use their own labor and farm-produced lumber. 

The cash investment in a 10, 000- bird capacity broiler house might 
be $5,000 or more at 1959 cost levels. For a 2,000-bird laying flock, 
the producer's cash investment in buildings and equipment could be as 
high as $4,000. Out-of-pocket expenses for constructing and equipping 
the pig parlor and farrowing houses needed for a 24- sow contract would 
amount to $2,500 or more. The total amount by which the capital in- 
vestment in these farms has been increased depends on how much addi- 
tional value is estimated for the farmer's own labor and materials used 
in the construction. 

For contract farms in the aggregate, the authors know of no esti- 
mates that indicate the additional capital investment or the increase in 
the use of operating capital. Some calculations have been made so as 
to get an idea of the magnitude of these estimates for the southeastern 
broiler industry. For the greater Southeast, the ten states that lie east 
of the Mississippi and south of the Ohio and Potomac Rivers were in- 
cluded in the calculations. The broiler houses used in contract produc- 
tion and other forms of vertical production in 1959 were estimated to 
have a cash investment cost of about $90 million and a total investment 
cost of about $135 million, assuming $45 million to be the value of the 
operators' noncash investment. One way of picturing the sheer magni- 
tude of the physical investment is to say that if these houses were laid 
end to end, they would extend from Knoxville, Tennessee, to Reno, Ne- 
vada, with enough left over to go on to Los Angeles. More than four- 
fifths of the investment in broiler houses has been made since 1950. 

The value of feed, chicks, and miscellaneous supplies provided by 
integrators in 1959 was estimated roughly at $350 million, about 40 per- 
cent of the value of all feed and livestock expenditures in the region. In 
1940 the amount of broiler financing by integrators probably was less 
than $10 million. 



REASONS FOR CAPITAL EXPANSION 

Capital resources in the enterprises mentioned would have expanded 
somewhat even without contracts. Since 1945 the economy as a whole 
has been prosperous, and although farm incomes have been less favor- 
able than nonfarm incomes, the level has been sufficiently good to 



150 LAWRENCE A. JONES AND RONALD L. MIGHELL 

provide funds for loans and investment. The possibility of increased 
efficiency through improvements in machinery and equipment has caused 
capital growth in almost all segments of agriculture (Chapters 6 and 7). 
In view of the technological innovations in production of broilers and 
other integrated commodities, it is reasonable to assume that much 
capital would have been attracted even if contracts had not developed. 

If contract farming had not developed, however, the use of capital 
would have grown at a slower rate, particularly in the Southeast and for 
low- income farmers. Basic forces that have encouraged the flow of 
capital to farming through integrated channels have included technolog- 
ical innovations, expansion of production in the feed and fertilizer in- 
dustries, growth of retail chains, supermarkets, and other means of 
mass distribution, and the recognized possibilities of profit by integra- 
tors. 

Of importance is the fact that a contract is often an "open sesame" 
which unblocks the flow of resources to agriculture. Ordinarily, cap- 
ital expansion is restricted in several types of situations. These situa- 
tions are especially prevalent in the South because: (1) some farm op- 
erators lack knowledge of profitable investment opportunities or the 
ability to carry them through (Chapters 14, 21, and 23); (2) some are 
reluctant to borrow because of uncertain prices or markets — the chance 
of impairing or losing the equities in their own farms is one they do not 
wish to take (Chapters 14 and 21); (3) some may be reluctant to borrow 
because of a misunderstanding about the value of using credit or be- 
cause they believe it to be morally wrong (Chapter 20); and (4) others 
may wish to use credit but are turned down by the lender on grounds of 
risk— usually low management ability or too much uncertainty regard- 
ing production or markets (Chapter 13). 

A production contract often overcomes these drawbacks to capital 
investment. The integrator provides a ready- made production program 
with built-in guidance in new technology and management. He also pro- 
vides price or income guarantees and access to markets. Financing in 
the form of supplies provided by the contractor does not create a debt. 
Consequently, it is not objectionable to farmers who would be reluctant 
to borrow. Since uncertainties of income are reduced, producers are 
willing to invest more of their own money and labor. They are also 
better able to obtain loans from regular lenders to finance buildings, 
equipment, and miscellaneous operating expenses. 

How much the grower's income uncertainty is reduced depends, of 
course, on the type of production contract. Any kind of stop- loss guar- 
antee eliminates the possibility of negative net cash returns; a straight 
salary or wage contract eliminates almost all of the uncertainty for the 
period of the contract; a flat fee per head or per pound limits the uncer- 
tainty to the physical hazards. 



VERTICAL INTEGRATION 151 

UNCERTAINTY AND CAPITAL EXPANSION 

The relationship between uncertainty and the investment of capital 
resources is so important in some instances that the subject deserves 
special attention. This can be illustrated by referring to the history of 
commercial broiler production. Here, one of the chief reasons for the 
development of contractual arrangements was the high degree of uncer- 
tainty with respect to financial outcome that faced independent pro- 
ducers. Feed dealers and other integrators were better able to cope 
with the uncertainties and to continue to supply the necessary resources. 

Disease and heavy mortality of birds originally constituted the main 
source of uncertainty. Even in the late forties, death losses of broilers 
in Delaware were as high as 40 percent or more for some producers. 2 
Since that time, the disease problem has been greatly reduced, and 
widely fluctuating prices have constituted the major source of uncer- 
tainty. In 1959 average weekly prices of broilers in Delaware varied 
from a low of 14.5 cents per pound to a high of 20.3 cents. An individ- 
ual broiler producer might be unlucky enough to experience heavy mor- 
tality or be obliged to market his birds during a period of low prices. 
A feed dealer with many flocks under contract is more concerned with 
average mortality and the average of prices for all lots during the en- 
tire year. These averages can be predicted with more certainty than 
can the production of a particular producer or the price during a par- 
ticular week. 

To illustrate the difference between the way a feed dealer and an 
independent producer view the uncertainty of mortality in growing 
broilers, judgment probability curves have been developed for each. 
These curves are based on data from a study of 180 flocks produced in 
the last half of 1952 in Delaware. 3 The mortality among these flocks 
ranged from almost zero to more than 30 percent. This experience 
indicates that a mortality expectation curve for an individual producer 
based on that period would be relatively wide and low, skewed to the 
right, and with a modal frequency of about 6 percent mortality (Figure 
8.1). The curve indicates a probability that the mortality would be 10 
percent or more in 1 in 4 flocks and that the mortality would be 20 per- 
cent or more in 1 in 20 flocks. The chances of experiencing these 
higher losses, even though small, would influence producers to seek 
arrangements that would make returns more certain. 

In contrast to the producer's situation, a probability curve as viewed 
by a feed dealer would be high and narrow (Figure 8.1). The uncertain- 
ties that confront the individual producer would disappear in the aver- 
age. The feed dealer is confronted with the uncertainty of the level of 
the annual average. The average mortality for 180 flocks during the 
last half of 1952 was 8 percent. In the subsequent three years, the 



2 W. T. McAllister and R. O. Bausman, Influence of Management Practices on Cost of 
Producing Broilers in Delaware, Winter 1948-49, Del. Agr. Exp. Sta. Bui. 282, Jan., 1950. 

3 Unpublished data from study reported in Frank D. Hansing, Financing the Production 
of Broilers in Lower Delaware, Del. Agr. Exp. Sta. Bui. 322, Oct., 1957. 



152 



LAWRENCE A. JONES AND RONALD L. MIGHELL 



Frequency Distribution, Early 1950s 










% 




















30 






























" 






20 


-i 


Integr 


ator 




















Independent pr 

1/ 


aducer 


10 














W/ 














/, i , , 1 , i . i 


, , ,\s. 


■—^-J.! ■ ■ 




1 1 1 l/ 1 1 1 l\ 1111 1 _J_J__L_L 








10 20 30 10 20 


30 


MORTALITY (PERCENT) 




U.S. DEPARTMENT OF AGRICULTURE NEC 60(2)-2864 AGRICULTURAL RESEARCH 


SERVICE 



Fig. 8.1. Expected mortality of broilers. 



mortality averaged 7.1, 8.0, and 6.2 percent, respectively. This sug- 
gests that a dealer with a large number of flocks under contract could 
have expected with much certainty, at that time, that the average annual 
mortality would not vary from year to year by more than 2 percentage 
points. In effect, what was a major uncertainty to each individual pro- 
ducer was converted by the integrator into something more like a 
smaller calculated risk. A calculated risk is just another cost of doing 
business. 

The differences between individual producers and integrators in 
ability to cope with fluctuating broiler prices are similar to the differ- 
ences in meeting the uncertainty of mortality. The farmer who pro- 
duces four lots of broilers a year must look at the probabilities of 
marketing his birds at various prices. Using Delmarva weekly price 
data for 1957, for example, a probability curve was constructed that is 
slightly rounded and relatively low and wide (Figure 8.2). Average 
weekly prices ranged from a low of 14.5 to a high of 23.0 cents per 
pound. The probability of an individual producer marketing his broilers 
that year at 17 cents or less was the same as the probability of receiv- 
ing 21.5 cents or more. On the other hand, a feed dealer who keeps up 
with price trends and operates on a large enough scale to market his 
broilers continuously throughout the year might have been able to pre- 
dict his average sales price within 2 or 3 cents (Figure 8.2). 



VERTICAL INTEGRATION 



153 



Independent producer 




Frequency Distribution, Late 1950s 

% 

30 



20 



10 



20 25 10 15 

CENTS PER POUND 




Lid 



25 



U. S. DEPARTMENT OF AGRICULTURE 



NEC 60 (2)-2865 AGRICULTURAL RESEARCH SERVICE 



Fig. 8.2. Expected broiler prices. 



IMPERFECTIONS IN THE CAPITAL MARKET 



Is contract farming an outgrowth of imperfections in the capital mar- 
ket for agriculture? Admittedly, perfection is unattainable, but one may 
take as the prototype of one concept the market through which new is- 
sues of stocks and bonds are sold. This is an impersonal market includ- 
ing large numbers of new issues and many prospective investors. The 
capital issues are standardized into homogeneous classes as to type, 
quality, and denomination. Information about these characteristics and 
market conditions is widespread. Through changes in supply and de- 
mand and the interest rate, this market acts to channel capital from 
savers and investors to various segments of the economy. Under this 
concept, emphasis is on the degree of perfection at which the specific 
market mechanism functions, with little consideration for the need for 
other institutions. 

However, the concern here is with a broader concept which implies 
that there is some optimum amount of capital or credit that the market 
should provide to farming (Chapter 3). Is capital as readily available 
as in other areas and in other industries ? Is the supply large enough to 
employ existing labor resources and promote efficient production? Is 
the supply of capital sufficiently mobile and are the institutions suffi- 
ciently flexible to permit agriculture to adjust to changing conditions ? 



154 LAWRENCE A. JONES AND RONALD L. MIGHELL 

With this concept of a capital market, the word "adequacy" may be the 
main point of consideration. Part III is also concerned with the ade- 
quacy of the capital market. 

The capital market for agriculture obviously has operated neither 
flexibly nor smoothly, never approaching a state of perfection or ade- 
quacy according to either of the two concepts. Information concerning 
the supply and suppliers of capital and the prospective demand for and 
users of capital has been imperfect. Lack of uniformity among farms 
and farmers usually requires that direct investment and loans be han- 
dled through individual negotiation. Interest rates tend to be inflexible, 
lending customs often are rigid, and the conventional institutions that 
regulate the flow of capital and credit to agriculture are relatively slow 
in adjusting to changing conditions (Chapters 15-17). 

Undoubtedly, the restrictions on the movement of capital funds into 
agriculture, either through equity investment or through the credit sys- 
tem, have been significant in stimulating the development of contractual 
arrangements. The capital market for agriculture continues to be far 
from perfect, but wherever contracts have expanded rapidly the changes 
have been in the direction of a more perfect market. Suppliers of cap- 
ital have increased, standardization is more widespread, production is 
more uniform, and information is more complete with respect to mar- 
kets and income. 

In the sense of adequacy indicated above, the capital market has be- 
come more perfect, at least in the short run. Contractual arrangements 
have met a need, or demand, for capital that is felt by many farmers. 
They have provided employment for the labor of farmers and have in- 
creased their incomes. Both individual and aggregate adjustments 
probably represent a better use of resources than would otherwise 
have occurred. 

This may be difficult to prove because it is not known what alterna- 
tives to contract farming might have evolved. However, it is known 
that the addition of contract farming to the kit of structural devices 
makes for more effective treatment of specific problem situations. It 
is expected that other devices will be developed to reduce uncertainty, 
provide capital, and accomplish other objectives even more effectively 
in the future. 



THE PLACE OF SPECIALIZED LENDERS IN CONTRACT FARMING 

As contracts multiply and integrators supply increasing amounts of 
capital, one might well ask about the role of banks, production credit 
associations, and other specialized lenders in this development. How 
fundamental are the changes that contract farming has made in the mar- 
ket through which agriculture draws capital and credit? 

Crops grown under contract continue to be financed largely by reg- 
ular lenders. But many farmers operating under livestock contracts 
are receiving capital through a different set of institutions. Investment 



VERTICAL INTEGRATION 155 

in and retained earnings of agri-business — supply, processing, and 
marketing organizations — constitute one of the important new sources 
of funds for farming. Significant changes have occurred also within the 
more traditional banking and credit system. This system is still the 
basic source of much of the operating capital used under contracts, but 
the capital reaches the producer by a roundabout route. For example, 
city banks make loans to large feed manufacturers who, in turn, extend 
supply credit to feed dealers. Feed dealers also may borrow money 
from banks. They are then able to provide "financing" to the producer 
in the form of chicks, feed, and supplies. 4 When a farmer cooperative 
is a contractor, the funds may be obtained from one of the Banks for 
Cooperatives. The contract producer of broilers, eggs, and hogs bor- 
rows relatively little from the local country banks or production credit 
associations except for building construction or the purchase of equip- 
ment. The new institutional arrangements are still minor as a source 
of credit or capital for agriculture as a whole, but are well established 
in many contract farming situations. 

The chief reason why local lenders seldom finance farmers directly 
for the expense of growing broilers is that operating capital is only one 
of the requirements. Technology, management supervision, a market 
for the birds, and a guaranteed minimum return must be provided if the 
operation is to be economically successful for either the producer or 
the supplier of capital. These are functions usually considered to be 
outside the field of credit. In fact, most institutional lenders could not 
go very far in participating legally in these activities even if they wished 
to do so. 

True, many lenders seem to be moving in the direction of providing 
more services to farmers. Many banks are hiring trained agricultural 
men who help farmers plan operations and adjustment programs (Chap- 
ters 16 and 18). They may also give suggestions on new technology and 
markets. In a few instances, production credit associations have gone 
so far as to team up with cooperatives to provide financing to their con- 
tract producers. But even here, most of the functions of the integrator 
are assumed by the farmer cooperative. Credit is the only service 
provided by the PCA, and it is partly guaranteed by the cooperative. 

Perhaps many feed dealers and processors who operate with con- 
tracts would like to transfer the financing to the specialized lenders. 
But local lenders are unlikely to finance production directly to any great 
extent through contracts. Such activity, even if permitted by law and 
regulations, would involve a considerable reorganization of the lending 
business. Interest rates and other charges would be higher to cover 
costs of additional services and risks. 

Some economists believe that as farmers gain more experience 
under contracts and improve their financial condition, some of the 



4 The term "financing" as used here does not mean the extension of credit. Financing is 
a broad term that implies how the cost of assembling productive resources is met. The 
cost could be "financed" in various ways — by the producer, by the dealer, by the creditor, 
etc. 



156 LAWRENCE A. JONES AND RONALD L. MIGHELL 

larger- scale operators will become independent producers. In broiler 
production an appreciable shift could not be expected until the industry 
reaches a more mature stage of development with more stable product 
prices. Local lenders might then participate more in financing produc- 
tion, although banks, feed manufacturers, and other centralized sources 
are likely to continue to provide much of the financing. 



CONTRACTS VERSUS INTEGRATION BY OWNERSHIP 

Why do integrators choose contracts as a way to achieve their ob- 
jectives of selling feed, controlling quality, and scheduling production? 
These goals might have been attained by ownership or leasing of produc- 
tion facilities. Adoption of the contract method centers around the fact 
that under this arrangement most of the labor and the fixed capital 
needed for production— real estate, buildings, and farm equipment — 
are supplied by the farmer. 

In contrast to complete ownership of the facilities, contracts permit 
greater flexibility in a rapidly developing industry confronted with many 
uncertainties. A feed dealer can expand his output quickly, even though 
his assets and borrowing capacity are relatively small. His labor prob- 
lems are minimized, and he can require the farmer to carry the risk of 
new investments in specialized buildings and equipment. Some dealers 
and processors may wish to be ready to move in any of several direc- 
tions if current production conditions should prove to be temporary. 
For example, if broiler integrators should be forced to curtail or shift 
production, they could do so without undue concern over investment tied 
up in unused housing capacity. Any decline in the value of buildings 
caused by loss of markets or technological obsolescence would be at 
the expense of the producer, not the integrator. 

Another advantage of contracts is that the producer is frequently 
able to provide the fixed capital at lower cost than can the integrator. 
Many farmers in the South are willing to provide their labor in construct- 
ing buildings at little cost because its value for alternative uses is low. 
Similarly, the rate of return that the farmer expects on his real estate, 
or for timber supplied, may be relatively small. If the integrator were 
to buy the land and pay the going rates for labor and materials, his 
costs would be much greater. Thus, production through contracts, 
rather than through owner integration, has been fostered by the exist- 
ence of large pools of underemployed labor and other resources that 
yield low alternative returns and are therefore available for use at rel- 
atively low opportunity cost. 



EFFICIENCY OF CAPITAL USED UNDER 
CONTRACTUAL ARRANGEMENTS 

The widespread interest in contract farming is related to the 



VERTICAL INTEGRATION 157 

generally increased productivity of all the resources involved under 
this method of operation. It is logical to assume that outside capital 
does not usually seek investment in agriculture unless the investment 
will yield a return at least equal to the going rate in industry and com- 
merce (Chapter 5). The efficiency occurs in many ways, but mainly 
through the reduction in uncertainty and the spreading of new technology 
and improved management. Larger scale production also often reduces 
costs per unit. 

Great gains in efficiency have been made in production of broilers. 
By introducing improved breeds, better feed and medicine, and increased 
efficiency of labor and management, contract arrangements have helped 
to reduce mortality and to increase feed- conversion rates. Better build- 
ings and equipment — including automatic feeders — have helped to in- 
crease output per unit of input of capital and labor. 

In 1940, 481 feed units were required to produce 100 pounds of 
broilers. 5 In 1950 the number of feed units declined to 382 units, and 
by 1958 to 295 units. Improved efficiencies are shown most dramati- 
cally by the change in labor used. In the Appalachian region (Virginia, 
West Virginia, North Carolina, Kentucky, and Tennessee), the index 
number of production per man-hour of chickens, broilers, and turkeys 
was 89 in 1940, rising to 104 in 1950, and jumping to 212 in 1958. In 
the southeastern states (South Carolina, Georgia, Alabama, and Florida), 
the index in 1958 was 381, more than 4 times the index of 1940 and about 
3-1/3 times that of 1950. Production efficiencies have been increased 
in egg and hog production in many of the same ways, but contracts for 
these commodities have not expanded as widely as have those for 
broilers. 

Contracts have helped to increase productivity in crop production 
through integrators supplying fertilizer, high-quality seed, and special- 
ized services such as are needed at times in spraying and harvesting. 
Contract arrangements often result in less waste and improved quality, 
with more of the output reaching market channels. Less storage of prod- 
ucts is required, and the producer spends less time and effort in mar- 
keting. 



IMPACT OF CONTRACTS ON FARMING 

Lack of operating funds to make full use of fixed capital and labor 
is one of the long-standing problems of farmers. Southeastern agricul- 
ture probably has made slower progress than other regions in reducing 
this imbalance. The apparent shortage of capital in agriculture may be 
due simply to the reluctance of farmers to draw upon available supplies 
of capital and credit, or to their lack of knowledge as to profitable uses 
of such resources. In other instances, capital and credit, although 



5 A feed unit is the equivalent of a pound of corn in feeding value. R. D. Jennings, Con- 
sumption of Feed by Livestock, 1909-56, USDA Prod. Res. Rpt. 21, Washington, D. C, 1958. 



158 LAWRENCE A. JONES AND RONALD L. MIGHELL 

plentiful in the community, have not been available to producers be- 
cause of the uncertainties of production and prices. Substantial amounts 
of capital and labor in the hands of producers have remained partially 
unemployed as well. The advent of contract farming has altered many 
of these conditions. It has (1) shown how additional capital could be 
used, (2) provided new capital, (3) changed the attitude of producers 
concerning the use of more capital, and (4) reduced the risk or uncer- 
tainty of investment of capital for both farmers and integrators. 

Contracts bring about higher aggregate production through providing 
more capital, managerial, and technical services. This in turn affects 
the prices of farm products. The impact varies among commodities 
and areas, depending on the kinds and amounts of resources and serv- 
ices supplied. The effect may be offset by the extent to which aggregate 
production may be controlled, and by related changes in demand. Sup- 
ply may expand more relative to demand when the main force causing 
contracts is the desire of industry to sell feed, fertilizer, and other 
significant capital inputs. 

In a period of rapid expansion of contract production, the aggregate 
effects of increased and more efficient capital may therefore be higher 
total output and lower prices. The competitive pressure will be felt by 
higher cost areas and farms. Many independent producers may be 
forced into contracts if they wish to remain in business. Competition 
among integrators also increases, resulting in a drive toward lower 
costs and increased scale of production. 

Low prices seem to have placed contract broiler producers in a less 
favorable income position. Feed dealers are less active in seeking con- 
tract producers than in earlier years of broiler history. Production 
facilities on farms have expanded so greatly that the output capacity of 
those willing to produce may exceed the demand for broilers at prices 
that will yield reasonable returns to producers. Many producers will 
be willing to renew contracts under terms that will not yield a satisfac- 
tory wage as well as a return on their fixed capital investment. The 
bargaining position of many southeastern contract producers may be 
especially poor because of the few alternatives for profitable use of 
their capital and labor. Even when alternatives are available, relatively 
few of these producers would have the knowledge and additional re- 
sources needed to take advantage of them. 

A report on trends in broiler contracts in Louisiana indicates the 
economic pressure that producers throughout the Southeast have expe- 
rienced. 6 From 1954 to mid-1959, payment for broilers produced under 
the "flat fee" type of contract dropped from a high of 3-1/3 cents to 
about 1 cent per pound. Under "feed- conversion" plans, the base pay- 
ment in 1954 was about 2 cents a pound, with a "bonus" of 1 cent if the 
conversion was at less than 3 pounds of feed per pound of broiler. By 
mid- 1959 these rates had been reduced to provide three-fourths of a 



6 Paul Roy, "Recent trends in broiler and table egg contracts," Louisiana Rural Econ., 
Nov., 1959. 



VERTICAL INTEGRATION 159 

cent to 1 cent per pound of broiler plus one-fourth to one- half of a cent 
bonus if the feed conversion ratio was as good as 2-1/2 to 1. 

With regard to contract production of table eggs, Roy reported that 
the original flat fee of 10 cents per dozen had been reduced by mid- 1959 
to 6 cents or lower, with 2 cents extra in some instances for the more 
efficient producers who could meet feed conversion and quality require- 
ments. In the Sand Mountain area of Alabama, the fee paid to contract 
producers for large or medium eggs dropped from 12 to 6 cents per 
dozen during the five years preceding 1958, and integrators were offer- 
ing 4 cents in 1959. 7 Sometimes the contracts included bonus provisions. 

The action that integrators may take under increasingly adverse 
conditions is uncertain. However, contracts have had many modifica- 
tions and more will undoubtedly come. These changes will have varying 
effects, but it seems certain that the trends toward larger scale and 
more efficient output will continue. Another probability is that fewer 
contracts will be available to producers. Reports in trade journals in- 
dicate that feed dealers are becoming more selective and are not renew- 
ing contracts with producers who have poor feed- conversion rates. 
Some dealers are growing more broilers on their own farms. Some are 
making contracts for only one flock at a time, thus leaving producers 
with greater uncertainty as to renewal. The 1960's will be a period of 
adjustment for contract farming and contractual arrangements, espe- 
cially in production of broilers and table eggs. Before relatively stable 
conditions are reached, it is expected that there will be much experi- 
mentation on the part of both producers and integrators. 

The contract producers who should be most concerned are those 
who exhaust their financial resources for fixed investments in buildings 
and equipment. The risk is greater if a long-term debt is incurred to 
expand the investment. If total production rises and prices decline, this 
additional capital investment may provide improved returns for a rela- 
tively short period only. At a minimum, when planning a specialized 
investment in buildings or equipment to meet contract requirements, 
the producer should recognize the longer term income uncertainties 
and the need for a relatively short time schedule in which to depreciate 
the new capital and repay any added indebtedness. 

Another problem, almost unique to the contract method of financing 
production, concerns the equitable distribution of available returns be- 
tween integrators and producers. This is a problem that becomes ac- 
centuated as the fixed investment of producers becomes larger and 
their economic position weaker. For dairy and sugar beet production, 
where contracts have long been used, government market orders and 
programs have contributed to a stable price situation and equitable 
sharing between producers and processors. Auctions, which are devel- 
oping in some areas, will give producers access to markets other than 
through integrators. In some situations, the best solution may be the 



7 B. R. Miller and Morris White, Contracts vs. Independent Egg Production and Mar- 
keting, Ala. Agr. Exp. Sta. Circ. 135, Oct., 1959. 



160 LAWRENCE A. JONES AND RONALD L. MIGHELL 

formation of more cooperative marketing associations. In others, the 
organization of a bargaining association may be the means by which an 
equitable sharing of costs and returns may be negotiated. 

A final comment about contract farming as an innovation may be in 
order. We must recognize that it is an innovation in the same general 
sense as a technological or biological innovation. Certain generaliza- 
tions can be made about the behavior of innovations as a class. These 
generalizations hold true for both agricultural and nonagri cultural in- 
dustries. Innovations usually involve a growth in investment and pro- 
ductivity and result in basic readjustments within the affected industries. 
The economy experiences growing pains, and in the short run, some 
segments may be hurt. But these changes in technology and the result- 
ing shifts of income among individuals and movements of resources 
from one area to another are the marks of a dynamic and progressive 
economy. Innovations affect the position and shape of the supply sched- 
ules for the affected commodities. For example, the development of 
hybrid corn brought a shift in the supply schedule for corn. After that, 
more corn was produced at a given price than formerly. Similarly, the 
innovation of contract farming in commercial broiler production has 
caused a shift in the position of the supply schedule for chicken meat. 
The shape or elasticity of the supply schedule may have changed also. 
These shifts and changes are in the nature of innovations and the cost 
of adjustment to them is a part of the cost of progress. 



Discussion 



J. WARREN MATHER * 

A comment is warranted on the point made that contractual arrange- 
ments have provided much new capital for agriculture. Certainly this is 
true for the South and for poultry enterprises, but is this the case on a 
national or aggregate basis? To what extent has the increase in capital 
in the South been offset by a decline in other areas? This, of course, 
must be evaluated on a relative basis to take into account the absolute 
increase in capital in all areas to meet the food needs of an increasing 
population. It, therefore, seems to me that from the over- all standpoint 
of agriculture, integration may have affected the sources of capital more 
than the amount of new capital used. Quite obviously this has resulted 
in shifts in the use of capital among areas, enterprises, lenders, and 
farmers. 

Two questions regarding issues raised about imperfections in the 
capital market should be considered. First, do the lenders of capital to 
integrators consider their funds as going into agriculture— into farming? 
Or do they consider their capital as going into agri-business with the 



"Chief, Farm Supplies Branch, Farmer Cooperative Service. 



DISCUSSION 161 

business entity of the integrator, who retains title to the products and 
assumes most of the risks, as the most important consideration in loan 
security? Do the lenders to integrators consider the main function of 
such capital to be helping farmers produce food more efficiently and prof- 
itably? If not, then the charge of imperfections in the capital market ap- 
pears less valid. Moreover, if it is held that integration has attracted 
additional capital into agriculture by offering high returns, then overpro- 
duction and low prices resulting from excess use of capital introduces 
still other imperfections, and often a withdrawal of integration funds. 

Second, has not capital come into agriculture because of integration 
— rather than integration coming into agriculture because of lack of cap- 
ital or imperfections in the capital market? Supporting this reasoning 
is the fact that an adequate supply of capital has been available for the 
agricultural industry but it has not been available to many individual 
farmers because of excessive risks. Once these individual producers 
were tied- in by contracts with integrated feed or poultry processing 
firms, however, capital then became available. More security, less un- 
certainty, the spreading of risks, economies of scale, better manage- 
ment, and other changed conditions caused capital to flow to new entre- 
preneurial systems. 

If integration uses capital more efficiently, then it will employ less 
total capital for a given amount of production. How much more effi- 
ciently does an integrated firm use its capital than a number of individual 
producers? A study under way by Farmer Cooperative Service indicates 
that the capital used in broiler contracting by a few regional cooperatives 
had a turnover of 8 to 11 times in 1959, based on their monthly outstand- 
ing balances. How would individual farmers producing four to five 
batches a year compare? Would they turn their average capital require- 
ments only four to five times annually? Although their investment in 
land and buildings would remain the same for each batch, the turnover 
should be a little faster than this (four or five times annually) because 
they would not be able to obtain the maximum amount of capital for feed 
to finish each batch until the last three or four weeks of the production 
period. 

As a sidelight, the experience of one regional farm supply and mar- 
keting cooperative horizontally integrated with 70 branches (but not em- 
gaged in contracting) indicates that this system makes more effective 
use of operating capital than would be the case if these branches were 
all independent cooperatives. Although each branch deposits funds daily 
at its local bank, they also send checks to the regional association's 
bank to avoid keeping an excess of idle money. This general bank serves 
as a revolving operating fund for the branches, and as many as 60 
branches draw drafts on the general bank account for $750,000 or more 
on some days. The regional association also arranges for all loans 
needed in the system. 

The question of who provides the basic capital for vertical integra- 
tion or contract farming has a number of implications for farmers. 
Will the integrator or the financier of the integrator in effect control 



162 LAWRENCE A. JONES AND RONALD L. MIGHELL 

this segment of farming? Will either try to prevent overproduction or 
surpluses? 

Farmers will need to strengthen their bargaining power to insure a 
fair return on their capital. As mentioned, in some cases this may be 
accomplished by use of auctions, bargaining associations, and govern- 
ment market orders and programs. Furthermore, farmers also must 
do more of their own integrating by developing large, strong coopera- 
tives that will provide complete services. These would include produc- 
tion financing and management assistance, and processing and selling 
services in moving the product to the retailer or consumer. 

If this is an important part of the answer, the implications for farmer 
cooperatives are tremendous. Farmers have over $2 billion invested in 
purchasing and marketing cooperatives, but much larger amounts will be 
needed to finance both integrated production and marketing. For example, 
in poultry or hog enterprises, integration means feed milling, wholesal- 
ing, retailing, transporting, and financing; providing other production sup- 
plies and services; and assembling, processing, storing, transporting, and 
selling the product. It should be possible to develop arrangements with 
many local lending agencies to finance producers, and some progress has 
been made. However, to date, much of these funds for contract produc- 
tion have come through regional cooperatives and other sources. Some 
regional associations have set up credit associations, and others are 
considering them. 

Vertical integration of the farm supply operations of cooperatives 
generally has been quite beneficial to farmers. While benefits are usu- 
ally measured in terms of net savings per ton or dollar of business, 
they can be translated to returns on the farmers' investments in the co- 
operative. Such net savings of the principal regional wholesale and 
manufacturing cooperatives have been equal to 12 to 15 percent on in- 
vested capital or net worth in recent years. One large integrated asso- 
ciation serving southern farmers with purchasing, marketing, and con- 
tracting services has had a return of about 12 percent. Two large 
poultry marketing and feed supply cooperatives in the Far West have 
had returns of 18 to 20 percent. Both of these cooperatives have well- 
developed programs that are both horizontally and vertically integrated. 

In view of the growth and impact of integration on farming, farmers 
should carefully consider integrated cooperatives in investing available 
funds — both from the standpoint of efficient production and the effective 
marketing of their products. 

There is a definite need for more research on both contractual inte- 
gration and ownership integration in agriculture. Among the types of spe- 
cific information needed that pertain to capital and credit are: (1) amount 
of capital used in contract farming— by sources, by types of enterprises, 
and by areas; (2) costs of capital used in integrated programs to the inte- 
grator and ultimately to the farmer; (3) efficiency with which capital is 
used in an integrated enterprise compared with a nonintegrated one; (4) 
reduction of risks to farmers, integrators, and creditors under various 
methods of integration; and (5) the significance of any imperfections in 
the capital market for agriculture in the development of integration. 



Chapter 9 



PHILIP M. RAUP 

University of Minnesota 



Farm Family Capital 
Accumulation and 
Investment Processes 1 



THE ECONOMISTS OF EACH ERA have found themselves drawn 
or compelled by the events of their times to focus their economic 
knowledge on current problem situations. Tariffs in the 1 920's, 
unemployment in the 'SO's, and problems of war in the MO's gave the 
economic literature of those decades a distinctive flavor. It is not so 
easy to typify the fifties. That may turn out to be the decade in which 
we rediscovered the problems of economic growth that occupied much 
of economic thinking from Adam Smith to the First World War. One of 
the most prominent manifestations of this interest is found in the ex- 
tensive literature on problems of capital formation and investment. 

The calculation of growth rates, capital-output ratios, and global 
estimates of net capital formation by sectors and countries are charac- 
teristics of our time. This chapter is concerned with problems of cap- 
ital formation and investment, but on a reduced scale. The focus will 
be on regional and sectoral differences within the American agricultural 
economy, with particular reference to farm firms and households. 

This choice of subject matter is dictated in part by a dissatisfac- 
tion with some of the agricultural policy recommendations for under- 
developed regions or countries that are being derived from analyses of 
mass data. In greater part, it is a reflection of the basic fragmented 
nature of capital formation in the agricultural sector, in which global 
outcomes are the aggregation of decisions by what is still the largest 
number of firms in any single segment of the American economy. 



CAPITAL FORMATION PROCESSES LEADING TO 
AGRICULTURAL GROWTH 

At the outset it is important that knowledge of the capital-forming 
processes which lead to agricultural growth is properly understood. 
This process is predominantly one of accretionary gains in capital 
stocks in the early stages of a nation's development. The investment 
decisions involved are typically made in small segments, spread over 



1 The author has benefited from the helpful suggestions of Reynold Dahl, Darrell Fienup, 
and Harald Jensen. 

163 



164 PHILIP M. RAUP 

many seasons or gestation periods. The aggregation of capital formed 
in this manner leads to impressive totals, but these totals are the re- 
sult of a process which is characterized by many small, even plodding, 
steps. The emphasis on large-scale and dramatic investment pro- 
grams in the current literature on economic development may obscure 
this relationship. The image of development projected by a hydroelec- 
tric dam or by a steel mill is likely to be misleading if applied to agri- 
culture. Capital in farming is rarely concentrated, in a spatial sense, 
and its formation is heavily weighted by the time dimension. It accu- 
mulates by an incremental process. 

The results can be seen most readily in the case of livestock. In- 
creases in livestock numbers and quality, the slow improvements in 
feeding levels, better animal disease protection, and increases in rates 
of gain are all achievements in which time plays an important role. 
Progress takes the form of small steps spread over many production 
cycles. This gradual accretionary improvement in livestock herds was 
one of the primary capital forming processes in the early stages of 
U. S. agricultural development. It is still under way in areas under- 
going major shifts away from reliance on cash crops to livestock agri- 
culture. It has been particularly prominent in recent decades in some 
states in the East South Central and South Atlantic regions of the United 
States. 

Although easily identified in the livestock sector, this accretionary 
process is also important in the stock of farm capital represented by 
buildings, fencing, water supplies, and related farm service structures 
and improvements. The stock of this form of agricultural capital is 
built up gradually over time and typically over several generations. 
The same situation applies to land- clearing, ditching, drainage, soil 
improvement, and conservation. The process of accretionary build-up 
is particularly prominent where tree or bush crops are an important 
part of the agricultural economy. 

The significance of these types of agricultural capital is reflected 
in the common observation that the "costs of producing a farm" are in 
general far beyond the capital-forming capacity of any one farm family 
generation. It is also reflected in the often discouraging experiences 
with farm development and land settlement schemes. The attempt to 
provide farms as going concerns through tenant purchase programs in 
the South, the resettlement programs in the Lake States (notably the 
Beltrami Island project in northern Minnesota), and the Matanuska 
Valley settlement program in Alaska are all cases in point. In each of 
these instances it proved impossible to finance the establishment of 
successful farms through any schemes for repayment during the life- 
time of a single farm operator family. These examples from recent 
history reinforce the evidence from our pioneering experiences in the 
nineteenth century: the saving and investment potential of several gen- 
erations is required to form the base capital needed before farm firms 
can take advantage of the high levels of input and output made possible 
by modern technology. 



ACCUMULATION AND INVESTMENT PROCESSES 165 

This historical discussion should serve to remind us of the validity 
of two general propositions: 

1. The accretionary forms of agricultural capital formation are 
important in early developmental phases, and in phases involving a 
shift from a cash-crop economy to a livestock-feed economy. 

2. The time required for the effective operation of these accretion- 
ary processes is long in terms of human life spans, typically extending 
over several generations. 

From this point of view it is instructive to examine briefly some of 
the current theories which have been developed to account for lags and 
spurts in economic growth processes. One of the most challenging of 
these is offered by W. W. Rostow in attempting to explain the processes 
through which some economies have broken away from a predominantly 
agricultural base into a "take-off " stage that has subsequently led to 
self-sustaining industrial and agricultural development. 2 The initial 
stirrings of economic growth have typically been followed by relatively 
long periods of seeming stagnation in the growth process before the 
take-off stage. New agricultural processes are adopted, the shift to a 
money economy becomes apparent in rural areas, small but significant 
capital inputs appear to take place, yet nothing appreciable happens. 

Our brief look at the historical process of capital growth in Ameri- 
can agriculture suggests that one reason for this delayed response may 
be the time required for accretionary formation of capital in agricul- 
ture. Where these capital stocks are biological in nature, the limits 
within which the capital-forming process may be accelerated are 
rather definitely fixed. Agricultural policy for maximum growth in 
this phase of development would seem to call for the creation of pat- 
terns of production, consumption, and investment that will maximize 
accretionary processes. 

Some of the basic conditions for agricultural development will be 
presented below. We may assume, as a point of departure, that we are 
dealing with an agrarian economy of a predominantly subsistent nature 
that can be characterized as a "subsistence-equilibrium " structure. In 
order for growth to occur under these circumstances, the most obvious 
and necessary condition is that an economic surplus potential be avail- 
able for capital-forming uses. Douglas North has put this same propo- 
sition in a more advanced form by including the need for an "export* 
sector in which the agricultural products can be exchanged for domes- 
tic manufactures from outside the region, or for capital goods obtained 
through foreign trade. North demonstrated in his study of southern ag- 
riculture in the nineteenth century that the existence of this export 
sector is insufficient by itself to guarantee growth. 3 A return flow of 
the proceeds from the export sector is also necessary, with the 



2 W. W. Rostow, The Process of Economic Growth, New York, W. W. Norton and Com- 
pany, Inc., 1952, pp. 12-21. The argument is substantially expanded in his The Stages of 
Economic Growth, Cambridge University Press, New York, 1960, pp. 21-26. 

3 Douglas C. North, "Agriculture in regional economic growth," Jour. Farm Econ., 
Vol. 41, No. 5, Dec, 1959, pp. 943-57. 



166 PHILIP M. RAUP 

maximum possible fraction of this return flow accounted for by com- 
plementary raw materials or producer goods. 



LAND TENURE AS A METHOD FOR CAPITAL FORMATION 

Based upon the above discussion, it is proposed that the land tenure 
system constitutes a major force in creating an environment for moti- 
vation that will maximize the accretionary formation of capital in agri- 
culture, and insure that available surpluses above subsistence levels 
are reinvested in the productive plant. In exploring the significance of 
the above hypothesis, and in attempting to derive from it some impli- 
cations for agricultural policy, it is important to examine the manner 
in which tenure security can contribute to capital formation. By giving 
an individual or a group the preclusive use of a productive asset, a sit- 
uation is created in which the investor can realize a satisfactory re- 
turn on his investment. This security of expectation is crucial for bio- 
logical forms of capital, slow maturing enterprises, and undertakings 
in which the ultimate stock of productive assets is composed of numer- 
ous incremental additions made at successive intervals over many 
production cycles. 

Anthony Scott has pointed out the importance of making rights of 
asset use specific to the user, whether owner or tenant, in any process 
requiring long-term investment. "Unless the individual can appropri- 
ate and distribute the benefits created by his efforts and his property, 
he has no incentive to achieve efficiency in their provision. " 4 

A system of tenure that will make these rights of use and reward 
specific to the user is a necessary, although not a sufficient, condition 
for capital formation. The tenure under which assets are held must 
also be adequate, in terms of time and scale, to motivate the user to 
reinvest his surplus. 

The statements and propositions to this point are encompassed in 
the traditional observation that the prospect of ownership has served to 
"turn sand into gold." The beneficial results of the prospect of owner- 
ship are well understood, but the specific manner in which motivation 
is conditioned and directed by this prospect is less commonly recog- 
nized. 

It is now hypothesized that the tenure arrangements under which 
productive resources are held and used will affect farm firm and farm 
family patterns of expenditures, savings, and investment by their influ- 
ence upon: 5 (1) the operator's time preference for money income; 
(2) the allocation of expenditures between the farm firm and the farm 
household, over time; (3) the allocation of expenditures within the farm 
household as between goods and services for direct consumption and 



4 Anthony Scott, Natural Resources: The Economics of Conservation, University of 
Toronto Press, 1955, p. 117. 

5 Proceedings of the Interregional Land Tenure Research Workshop, Work Group A, 
University of Missouri, July 16-27, 1956. 



ACCUMULATION AND INVESTMENT PROCESSES 167 

expenditures upon the family residence; and (4) the disposition made of 
the total available labor time of the farm family. 

The implications of these hypotheses will become clearer if two of 
the principal characteristics of a peasant-type or family farm agricul- 
ture are examined. As it has developed in Europe and North America, 
this structure of agricultural firms combines a mixture of owner- 
operated units with units operated by farm tenants under widely varying 
conditions of tenure duration and security. 

From the standpoint of capital formation, the first important char- 
acteristic of the small proprietary or family firm is that consumption 
in the household must take place in the face of an alternative — invest- 
ment in the firm. Every act of consumption thus requires a decision 
not to invest in the productive enterprise. The structural or organiza- 
tional characteristic of the firm does not permit a separation of these 
decisions. They are joined within the family and usually within a single 
individual. 

A decision-making complex of this nature is not unique to owner- 
operated farm firms. It is also found in small enterprises in retail 
trade, and in former years it was commonplace in manufacturing and 
industrial operations. Although this characteristic is not unique to 
agriculture, it is still a particularly prominent feature of farm produc- 
tion units. It has prevailed long after the proprietary firm has disap- 
peared in all but small segments of the retail and service trades among 
nonagri cultural occupations. 

Operation within this consumption-investment matrix is calculated 
in two different units of measurement, viz., (1) the allocation of money 
income and (2) the allocation of family labor time. In terms of money 
income, and where tenure security is at a maximum, the operator can 
afford to balance the alternatives of maximum return over time from 
slow maturing enterprises against possibly lower yielding but quick- 
turnover forms of investment. Within the framework of his time hori- 
zon, which is typically confined to one generational change, he can ra- 
tionally afford to undertake investments, the yield of which may not 
reach a maximum in his lifetime. He can also afford to contemplate 
the alternatives of appreciation in the value of his capital assets as 
against the enjoyment of realized periodic income. In short, a maxi- 
mum incentive situation is created in which the growth aspects of in- 
vestment can be weighed heavily when balancing them against annual 
yield. 

A second important characteristic of the proprietary firm concerns 
the disposition of family labor. The prospects of long and secure ten- 
ure may also provide maximum incentive for the investment of total 
available labor time in productive undertakings. As with money income, 
each decision to allocate family time to leisure, or to work activities 
outside the farm firm, must be taken in the face of the clear alternative 
possibility of using this labor in the firm. Much of agricultural capital 
formation can be explained in this fashion. Livestock care, repair and 
maintenance of structures, drainage and soil improving practices, and 



168 PHILIP M. RAUP 

a variety of similar tasks are often accomplished in agriculture at the 
expense of what might validly be regarded as leisure time. 

The fact that these incentive conditions are created by a tenure 
system is no guarantee that they will be used. The scale of farm oper- 
ations is often too small, enterprises are not properly balanced, or the 
cultural and motivational patterns that might lead to these forms of in- 
vestment may be lacking. 

The biological nature of agricultural production bears heavily on 
these patterns of investment of family labor. Much of the "cost* of ag- 
ricultural production is a time cost. Crops must ripen, animals must 
mature, and a principal part of the labor cost of these processes is the 
cost of waiting. 6 Even well-organized farm firms with a good balance 
among the labor requirements of different enterprises have substantial 
time periods in which the labor force must be on hand but is for the 
moment technically underemployed. A key to the processes of agricul- 
tural capital formation lies in the analysis of the use made of this pe- 
riodically available labor. 

Many farmers have time periods when this form of labor input is 
available at an opportunity cost that approaches zero, or is measured 
only in the reservation price of leisure time. An incentive system that 
will maximize the investment of this labor in the firm is one of the 
basic requirements for agricultural growth. In terms of capital crea- 
tion, that structure is best which creates the maximum likelihood that 
the farm family will elect to "exploit" its own labor. Basic to this ar- 
gument is the expectation of a long-term rise in real incomes. When 
incomes are falling or are uncertain, existing levels of living tend to 
be maintained at the expense of unrewarded depreciation or ultimate 
exhaustion of land and capital. The capital-creating combination of se- 
cure tenure and expectations or rising real income has its antithesis in 
the form of unrealistically high consumption goals coupled with the 
prospect of falling real income. 

Some informative observations supporting this view of the nature of 
labor and capital investments in agriculture have recently been made 
by Simon Kuznets. 7 Working with data for American agriculture from 
various studies, Kuznets points out the contradictory results obtained 
in attempting to allocate agricultural income between labor and capital 
(cf. Chapter 3). In general, two variants of a residual method have 
been used by most research workers to estimate returns to labor and 
land in agriculture. In one, the return on property is estimated directly, 
and labor income is the residual. In the other, labor returns are esti- 
mated directly, and property income is residual. The resulting esti- 
mates are untenable since "... a direct estimate of the return on the 
property component leaves a return on labor that is below the going 



6 John M. Brewster, "The machine process in agriculture and industry," Jour. Farm 
Econ., Feb., 1950, pp. 69-81. 

7 Simon Kuznets, "Quantitative aspects of the economic growth of nations, Part IV, dis- 
tribution of national incomes by factor shares," Economic Development and Cultural Change, 
Vol. 7, No. 3, Part II, April, 1959. 



ACCUMULATION AND INVESTMENT PROCESSES 169 

wage of hired labor; and a direct estimate of the return on labor leaves 
a return on property distinctly below any comparable market return 
rate." 8 

Kuznets concludes that if the data can be trusted, the existence of 
dual markets for capital goods and labor must be recognized. In one 
market, capital flows and labor moves in response to highest returns. 
In the other market, in which agriculture is the dominant but not the 
only sector, the flows of capital and labor are "tied to the way of mak- 
ing a living by combination with some specific type of labor service.* 9 

These inferences suggest strongly that labor and capital inputs in 
agriculture are triggered by motive forces that are partially independ- 
ent of off-farm opportunity costs and prices. This inference is con- 
sistent with an argument that tenure incentives exercise a strong 
motive force in agricultural capital formation, leading to continued in- 
vestments of both capital and labor in the face of off -farm rates of re- 
turn that are demonstrably higher. 

In the currently peculiar position of American agriculture, plagued 
by surpluses, this reasoning would suggest that tenure incentives to 
capital formation may have worked too well. If a longer term view is 
considered, it can also be argued that these nonprice motives have 
been one of the sources of the strength and vigor of American agricul- 
ture. 

These optimum conditions for capital formation in agriculture have 
been presented in terms of the owner -operated farm firm. It does not 
follow that the only form of tenure that can create these conditions is 
ownership. Leasing arrangements can create security of expectations 
specific to the operator, and for a period of time long enough to en- 
courage long-term investment (cf. Chapter 2). Leasing arrangements 
that approximate this situation can be found in northern Europe, the 
United Kingdom, Australia, and in several other agricultural areas. 
Leases providing this degree of security are comparatively rare, and 
they were not characteristic of the periods of greatest agricultural de- 
velopment in North America in the nineteenth century. They were 
most conspicuously absent in the South after 1860. 

Recognizing that the representative lease in American agriculture 
from our beginning as a nation has been some form of a short-term 
share lease, it will be helpful to examine more closely the implication 
of this tenure form for capital-forming processes. Where the land and 
buildings are provided by the landlord, with tenant contributions limited 
to livestock and equipment, the tenant has an incentive to invest in live- 
stock and equipment but not in land improvements or structures. Un- 
der the lease forms that have been economically significant in Ameri- 
can agriculture, the tenant has found it legally difficult and, in practice, 
virtually impossible to obtain reimbursement for the unexhausted value 
of any permanent improvements remaining at the expiration of his 



a Ibid., p. 26. 

9 Kuznets, op. cit., p. 27. 



170 PHILIP M. RAUP 

lease. Under these conditions, he had little or no incentive to devote 
income or leisure time to the gradual improvement or maintenance of 
the real property assets. Because of the importance of capital invest- 
ments in farm buildings for some forms of animal agriculture, this 
may also discourage the shifting from a cash-crop to a livestock-feed 
form of agriculture. 

Although this is the generalized motivational setting within which 
tenant farm operators must make choices between consumption and in- 
vestment alternatives, there are many exceptions. The most prominent 
of these exceptions is the tenant who is in fact an owner-in-prospect, 
renting from a parent, or who has some equally adequate assurance 
that he may aspire to the status of owner-operator. There is ample 
research evidence in the Midwest to indicate that this motivational 
setting does in fact exist on a number of rented farms. Where these 
ownership expectations are limited, and where this weak incentive sit- 
uation is associated with a heavily skewed pattern of income distribu- 
tion and a prominent "demonstration effect" of conspicuous forms of 
consumption by a social elite, there exists what might be characterized 
as a minimizing condition for capital creation, i.e., economic arrange- 
ments limit the incentive for investment and the cultural setting maxi- 
mizes the incentive for consumption. 

The argument to this point may be summarized as follows: The 
optimum conditions for capital formation in agriculture are established 
when tenure systems create the security of expectations that will per- 
mit a reduction in current withdrawals of income for consumption pur- 
poses in favor of investment in the expectation of greater long-term 
total gains. This reduction in current consumption and increase in in- 
vestment is strongly dependent upon the disposition made of leisure 
time. The necessary conditions are that the scale and organization of 
the firm be adequate to provide opportunities for these investments, 
and that the cultural setting sanction a suppressed level of current 
consumption in the interest of a reinvestment of income and family 
labor. 



REGIONAL DIFFERENCES IN TENURE AS RELATED 
TO CAPITAL FORMATION 

The conditions stated above were met in the pioneer phases of the 
settlement of the Middle West and the Great Plains in a combination 
that was rare if not unique in history. Tenure expectations were se- 
cure and specific to individuals. The choice of scale of firm and bal- 
ance of enterprise was subject to few restrictions. The supply of con- 
sumer goods and the pattern of income distribution did not permit the 
"demonstration effect" of superior consumption levels to interfere 
seriously with investment 

South of the Ohio and east of the Mississippi these conditions were 
present to a significantly smaller degree. In some cases they were 



ACCUMULATION AND INVESTMENT PROCESSES 171 

almost totally absent. Tenure conditions were frequently insecure on 
the better soils, the scale of individual operations was typically small, 
and monoculture was common. The disparity in incomes was great and, 
from the beginning of settlement, agriculture developed in the presence 
of comparatively high levels of consumption enjoyed by a small but so- 
cially dominant group. Among the members of this social elite, levels 
of consumption were high both in terms of income and in the disposi- 
tion made of leisure time. 

Regional differences in tenure systems, in short, created a situa- 
tion in which the South operated at a disadvantage in the accretionary 
formation of agricultural capital. These differences were greatest and 
the consequences most severe during the period from 1860 to the de- 
pression of the 1930's. This was the period in which the capital base 
was laid for the phenomenal increase in agricultural production during 
the 1940-59 period. 

The westward settlement across North America was accompanied 
by a massive creation of operating capital out of land. Forests were 
wastefully exploited and soil fertility was mined to create an artificially 
high level of consumption and capital formation. The North American 
pioneer, in effect, practiced a form of "shifting cultivation" on a conti- 
nental scale, from the first days of settlement until well into the twen- 
tieth century. He cut over, plowed up, depleted the land, and moved on. 
The regional disparity in this regard is also striking. The southern 
farmer played a prominent role in this exploitative phase of American 
agriculture, but differently. He, too, created capital and a synthetic 
level of living by exploiting labor and disinvesting the land, but after 
1860 he rarely moved on. 

One consequence of this voluntary immobility was the emergence of 
a class of owner-operators in the South whose tenure in land was as 
complete and as secure as in any region of the nation. Yet this security 
did not contribute to capital formation. These owner-operators were 
often on the hilly flanks of good soil regions, or on the exhausted soils 
left by prior cultural practices centered around continuous cash- 
cropping, little or no livestock and fertilization. The inadequacy of in- 
centive conditions for investment when there is little or no surplus to 
be invested was demonstrated in this region. 

The discussion thus far has been confined to the tangible forms of 
farm capital formation. In both farm and nonfarm sectors of any econ- 
omy an exceedingly important part of the total stock of capital is to be 
found in the education, training, and skills of the labor force (cf. Chap- 
ters 3, 4, 5, 22, and 23). Although this stock of human capital is diffi- 
cult to measure, its presence or absence can be readily detected. In 
the developmental stages of American agriculture, this form of capital 
investment was most commonly made in rural public schools through 
the medium of the property tax. Here again the land tenure system 
played an important role. Where the individuals who benefited were 
the children of the persons taxed, the identification of benefits with 
costs was immediate and within the range of comprehension of virtually 



172 PHILIP M. RAUP 

every taxpayer. This resulted in the early appearance of compara- 
tively heavy rates of rural property taxation that were largely self- 
imposed. 

Where the benefits of capital investment in education were not spe- 
cific to the individuals expected to bear the costs, and this was the 
typical situation in the South, the incentives for this form of capital in- 
vestment in human beings were weak. As a result, in some areas this 
led to a passive or even negative attitude toward the value of public 
education. The basic reasons for this situation were essentially the 
same as those connected with investments in land, improvements, and 
structures, i.e., it was by no means clear to the property owners who 
were required to pay the cost of educational facilities that they would 
be among the principal beneficiaries. 

In addition to wide regional differentials in the degree to which 
capital has been invested in human beings, there have also been sharp 
differences in the degree to which internal migration has resulted in 
capital "imports " or "exports." As settlement expanded westward, 
there was a continual inflow of capital in the form of adult human be- 
ings. For well over a century, this westward flow of people served to 
populate the frontier with a labor force whose rearing and training had 
required no local investment of capital. This capital inflow in the form 
of labor represented one of the most significant forms of early capital 
investment in American agriculture. 

A similar though smaller inflow of capital had taken place in the 
states of the Atlantic seaboard in earlier decades, augmented through- 
out the eighteenth century by the slave trade. Until the middle of the 
nineteenth century, the differentials between the North and South in 
these forms of human capital inflow were not great. They became 
great after the discovery of gold in California, the opening of the Ore- 
gon territory, and the construction of the transcontinental railways. 
Until the outbreak of World War I, the agriculture of the Middle West 
and the Great Plains was the direct beneficiary of a massive inflow of 
capital in human form, a composite of migration from home and abroad. 
This contribution to capital formation had largely run its course in 
southern agriculture by 1860. 

This capital flow through migration has been reversed. American 
agriculture is playing the unfamiliar role that had so long been played 
by the more urban and industrial regions of the eastern United States 
and Europe. Here, too, there are significant regional differentials. 
The outmigration of adult labor began earlier in southern agriculture 
and had reached proportions in the 1930's that were not experienced in 
the Middle West until the 1950's. In an evaluation of regional differen- 
tials in the capital position of American agriculture, the importance of 
these human capital flows has been underestimated. 

The discussion to this point has been devoted to ways in which the 
land tenure structure can create optimum incentives for capital forma- 
tion in agriculture. It would be helpful if these hypotheses could be 
tested by resorting to recorded data on state and regional capital 



ACCUMULATION AND INVESTMENT PROCESSES 



173 



stocks in agriculture and their rates of change. However, these data 
(i.e., state and regional breakdowns of the type now presented annually 
in the Balance Sheet of Agriculture) are not available. In the absence 
of such data, some insight into current patterns of capital formation 
can be gained by a brief examination of regional differences in farm 
firm and household expenditures. Estimates of expenditures for major 
items of farm production capital and major household expenditures for 
the United States and for the South easUqf the Mississippi are pre- 
sented in Table 9.1. >< ^r-^ -?»** *»* - • 

v QtVith 34 percent of the farms and 34 percent of the farm operator 
families in 1955, southern agriculture accounted for only 11 percent 
of the total production expenditures on livestock and poultry, 19 per- 
cent on farm improvements, and 19 percent on motor vehicles, ma- 
chinery, and equipment. *)In contrast,^expenditures on food and clothing 
were 29 and 31 percent, respectively, of the nation's farm totaO This 
was only slightly below the proportion that would be expected if the 
expenditures in southern agriculture per farm firm and household were 



Table 9.1. Comparison of Selected Farm Production 

and Family Living Expenditures, 

United States and South, 1955 







South Atlantic 


South 




Total 


plus East 


as percent 


Item 


United States 


South Central 


of U. S. 


Number of farms 


4,675,700 


1,576,400 


33.7 


Number of farm operator families 


4,760,050 


1,615,782 


33.9 


Class of Expenditure 








Farm Production 




(thousand dollars) 




Livestock and poultry 


2,593,781 


294,362 


11.3 


Repairs, maintenance and con- 








struction of farm service build- 








ings and other farm improvements 


1,727,739 


331,478 


19.2 


Motor vehicles, farm machinery, 








and equipment 


2,763,264 


510,124 


18.5 


Total Production Expenditures 


24,699,661 


4,363,666 


17.7 


Family Living 








Food 


3,963,519 


1,160,738 


29.3 


Housing 


4,133,006 


1,036,278 


25.1 


Clothing 


2,034,681 


639,290 


31.4 


Transportation 


1,798,149 


504,770 


28.1 


Total Family Living Expenditures 


15,722,505 


4,363,162 


27.7 



Source: Farmers' Expenditures in 1955 by Regions, USDA Stat. Bui. No. 224, Wash- 
ington, D. C, April, 1958, Tables .13 and 17. 



174 PHILIP M. RAUP 

in line with national averages. 10 \Expenditures on housing in the South 
were appreciably lower, accounting for only 25 percent of the national 
total. Some adjustment would be needed in this figure to make it com- 
parable with national estimates, due to climatic differences. N While ad- 
mitting the need for this adjustment, it would seem that housing ex- 
penditures in southern agriculture are well below the relative level of 
family expenditures on other consumption items. 

> Southern agriculture in 1955 accounted for 18 percent of total U. S. 
farm production expenditures and 28 percent of farm family living out- 
lays,^ Recognizing the crude nature of these comparisons, the over-all 
implication is clear, viz., in comparison with national totals, the rela- 
tive proportion of the income flow from southern agriculture devoted to 
consumption expenditures is significantly greater than the proportion 
allocated to farm production. These data suggest that current rates of 
investment in accretionary forms of capital in southern agriculture in 
1955 were substantially below the average levels prevailing in the 
nation. 

Many aspects of this particular discussion need more thorough 
analysis (cf. Chapter 27). The land tenure institutions of a region do 
not exist in a vacuum, and many other forces have shaped the progress 
of agricultural development in the South and throughout the nation. 
Moreover, the patterns of land tenure in some regions are changing 
rapidly. "Between 1935 and 1955 the percentage of southern farms op- 
erated by full-time tenants was cut in half, dropping from approxi- 
mately 60 percent of all farms to 30 percent^ The acreage of land in 
farms operated by full-time tenants in the South in 1954 was not signif- 
icantly different from the national average of 16.4 percent of all land in 
farms. Vjiowever,Cthis figure is misleading since (48 percent of the cot- 
ton acreage and 50 percent of the tobacco acreage harvested were in 
the hands of full-time tenants in 1954. 

In view of these rapid changes over the quarter -century of 1935-60, 
it would be instructive to examine differential rates of current capital 
investment on owner-operated and tenant farms in southern agriculture 
and in the Middle West. It is hoped that the hypotheses advanced here, 
and the arguments supporting them, can serve as a stimulus and guide 
for investigations of this type. 



10 The absolute dollar levels of expenditures on clothing provide a particularly sharp con- 
trast with regional differentials in production expenditures. Average expenditures per farm 
on clothing for selected regions in 1955 were as follows: 

South Atlantic (Florida, Georgia, North Carolina, South Carolina, Virginia, West 
Virginia) $383 

East South Central (Alabama, Kentucky, Mississippi, Tennessee) $388 

West North Central (Iowa, Kansas, Minnesota, North Dakota, South Dakota) $375 

See Supplement to Farmers Expenditures in 1955, USDA, AMS-354, Washington, D. C, Dec, 
1959, Table 7, p. 42. 



ACCUMULATION AND INVESTMENT PROCESSES 175 

IMPACT OF URBANIZATION 

We have witnessed a massive "urbanization" of the entire nation. 
Rural standards of living have advanced near the urban level, and the 
levels of achievement within these standards have moved very close to 
urban levels. The full weight of "Madison Avenue" has been felt in 
rural as well as in urban areas. Many developments have contributed 
to this trend. The closing of rural churches and incorporation of rural 
congregations into urban church bodies has been one prominent force 
working in this direction. A similar force has been the consolidation 
of rural schools. The Selective Service System has exercised a 
powerful influence in "uprooting" young men from isolated communi- 
ties in backward rural areas. The impact of the "demonstration ef- 
fect" of urban consumption on rural people has been dramatically 
increased by the virtually universal extension of good roads and of 
electric power to farms through the RE A. By 1959 three-fourths of 
all farm families had television and a larger percentage of farm fami- 
lies owned two cars than did their urban neighbors in many farm 
states. 

One of the most remarkable manifestations of this trend has been 
the rapid change in the quality of rural housing. Although severely 
handicapped by the absence of credit and financing arrangements now 
generally available in urban areas through mortgage insurance, re- 
discount, and loan guarantee programs of the federal government, farm 
housing has been markedly improved since 1945. We may be witness- 
ing, for the first time in our history, the emergence of the farm home 
as a consumption good, breaking sharply with its previous role as an 
adjunct to the farm firm. 

This upgrading in rural family consumption patterns occurs in an 
economic setting in which the key decisions for industrial nonfarm 
capital formation have been institutionalized. We can afford an ap- 
peal to the consumption aspirations of a mass industrial population 
with little danger that consumption expenditures at the family level 
will seriously restrict the nation's capacity for investment and new 
capital formation. This is not true in agriculture. The capital- 
forming process in agriculture is still predominantly personalized, 
(cf. Chapter 21). The rural decision to consume is a decision not to 
invest. Agriculture in this setting finds itself at a disadvantage. Un- 
able to provide expansion capital through the control of supply and 
prices, and the plow-back of earnings, the farm family is left with the 
traditional alternative of capital creation through the exploitation of 
family labor and levels of living. The potential inherent in this source 
of capital formation is impaired as rural levels of living and time al- 
location approach urban standards. We are left with the prospect that 
some method of institutionalizing the capital-creating decisions 
seems indicated for agriculture if current rates of agricultural ad- 
vancement and improvement in rural levels of living are to be main- 
tained. 



176 PHILIP M. RAUP 

In view of the rapid industrialization under way in the South, it is 
possible that the urbanization of the countryside may in broad terms 
lead to an uninterrupted line of development in' southern agriculture. 
It has been suggested in this chapter that agriculture in the South has 
been household-oriented and consumption-expenditure-conscious 
throughout the nineteenth century to the present. This region did not 
participate fully in the era of low consumption and heavy farm firm 
investment that was spurred by the prospect of free land and farm 
ownership. In the sweep of historical development in American agri- 
culture, it may well be that the phase of heavy investment in the farm 
firm, spurred by ownership expectations, has bypassed the South. Im- 
provements in the tenure structure that tend to improve incentives for 
farm firm investment are coinciding with increasing farm family ex- 
penditures on a scale that may still leave the capital-forming position 
of southern agriculture at a disadvantage. 



Chapter 10 

Adjustments and Capital 
Use in Agricultural 
Regions 



JOHN C. REDMAN 

University of Kentucky 



GREATER ATTENTION is being focused on the changes taking place 
in the agricultural sector of the economy. Adjustment problems 
inherited from the past along with the expected problems of the 
future make adjustment problems in agriculture more conspicuous. 
Population increases, changing tastes and values, technological devel- 
opments, and institutional changes are among the factors giving rise to 
perennial adjustments which must be expected and accepted. The effi- 
ciency of agricultural production varies considerably among different 
regions and among different segments of the agricultural economy. 
Heady discussed efficiency in the utilization of agricultural resources 
by the farm firm in Chapter 6. 

Maximum economic efficiency becomes intricate and complex and 
probably never will be attained. However, the considerable mobility of 
resources, such as labor and capital, provides evidence that the theo- 
retical system is descriptive of desirable end points which cause re- 
source shifts. The problem of unattainable ends derives, in part, from 
the fact that allocation for maximum net returns involves an anticipa- 
tion by entrepreneurs of each others' actions as influenced by the time 
required for production. Therefore, errors in expectations are respon- 
sible for a large part of the misdirection of resource use. Experience 
with these entrepreneurial expectations leads to internal and external 
capital rationing which tends to cause emphasis to be placed upon re- 
sources that are more flexible— namely labor. 

In a competitive equilibrium, a specific quantity of any resource 
should make approximately the same marginal contribution regardless 
of where it is employed. It is common knowledge that considerable dif- 
ferences in productivity of resources in agriculture exist within and 
among the geographic regions, and probably the most important reasons 
are the differences in the quantities of other factors available for com- 
bination with labor. This is not unlikely since about 60 to 75 percent of 
net farm income is attributed to labor when capital is valued at the cur- 
rent rate of interest. 

The increasing need for maximizing net returns will prompt farmers, 
owners, and users of farm resources to allocate their resources in the 
"best" possible way under the existing and anticipated circumstances. 
While the quantity and quality of resources available clearly affect the 

177 



178 JOHN C. REDMAN 

net return, the influence of social institutions in influencing resource 
adjustments must also be appreciated. However, the economic impact 
of resource adjustments on an area's economy is not fully understood 
because of the lack of knowledge of the technical rates of transformation 
and the rates of substitution of resources within regional and national 
aggregates. 

For the individual farmer, the relative level of income, and there- 
fore his standard of living, is determined by his ability to secure an ef- 
ficient use of his resources. Regional differences in income per farm 
or per unit of resource results from varying degrees of inefficiency in 
resource use. Thus, low- income problem areas result mainly from 
pressure on the land to provide subsistence, and tend to predispose high 
degrees of conservatism in decision- making (Chapters 14, 21, 22, and 
23). The unemployed or underemployed resources constitute one of the 
most basic of the long-range problems facing agriculture. Price sup- 
ports and allied programs contribute little or nothing to the long-range 
resource adjustments and may even retard desirable trends of this kind. 



TYPES OF AGRICULTURAL ADJUSTMENTS 

Differentials in productivity of resources are largely a function of 
the quantities and combinations used. It is recognized that resources 
are not homogeneous in all areas since, for example, a 640-acre farm 
unit in east Tennessee does not have the same quality of land as one in 
Iowa or the Mississippi Delta. Climate, level of technical knowledge, 
and value systems operating in the region clearly affect the productivity 
of resources in any particular region (Martin's discussion in Chapter 4), 
There is no doubt that equilibrating forces are operating, but there is 
considerable doubt that the efficiency in the sense of the equalizing of 
marginal returns for comparable resources in all regions will ever be 
achieved. 



Adjustments in Resource Organization 

Under conditions of changing demand and technology, the farm in- 
come of an area depends largely upon the ability of farmers to adjust 
their resources to changing conditions. Often these conditions are 
closely related to nonfarm developments through the impact of the factor 
and product markets. Some regions have more efficient factor and prod- 
uct markets and fewer impediments to adjustments in factor organiza- 
tion. 

Land use adjustments . The total acreage of cropland used in pro- 
duction expanded steadily along with the population until 1920, and has 
changed little since then, while population has continued to increase. 
This has resulted in a steadily decreasing per capita acreage from 3.8 
acres in 1920 to about 2.0 acres in 1960. Increases in population, 



ADJUSTMENTS AND CAPITAL USE 179 

expansion of industries, and scientific and technological advances in 
crop and livestock production have brought about shifts in the use of 
cropland. The resultant shifts reflect man's reaction to the environ- 
ment since adjustments are made according to what has been perceived 
to be economic. Thus, regional specialization of farming activities 
tends to be conducive to development of economic group interests which 
become concerned and demonstrative when changes affecting their par- 
ticular activities are taking place. 

The all-time high output from farm crops in 1957 was from the low- 
est harvested acreage since 191 7. 1 However, cropland harvested in- 
creased slightly immediately after World War II and remained almost 
constant until 1954 when it began to decline. Since 1940 some rather 
drastic changes have occurred in cropland used in the different agricul- 
tural regions. The New England states have experienced the greatest 
decline of any region, dropping to a low of 58 percent of the 1940 acre- 
age, or 50 percent of the 1944 World War II level. On the other hand, 
the Mountain states increased their cropland rapidly until the 1952 level 
was 140 percent of the 1940 acreage, but this growth has leveled off to 
slightly below the 1952 level. Since 1948 the Pacific states have main- 
tained the cropland acreage at about 112 percent of the 1940 level. The 
North Central states, which have a tremendous influence on farm output, 
have maintained cropland at 105 to 110 percent of the 1940 level with a 
slight decline since 1954. 

In addition to the New England states, the Middle Atlantic, South At- 
lantic, and South Central states have experienced a rather steady decline 
in cropland used, though somewhat less dramatically than the New Eng- 
land area. These three regions have experienced fairly close rates of 
decrease, reaching a low of 75 to 80 percent of the 1940 level for all the 
three areas. 

Adjustments in the number of farms, and consequently their size as 
measured by acres, are an important consideration in agriculture. 
Since 1929, about 1.5 million farms, or one-fourth of the number in the 
United States, have disappeared. About two- thirds of this decrease oc- 
curred during the 1945-54 period, with about one- third of the decrease 
occurring during 1949-54. Most of this reduction occurred in commer- 
cial agriculture, since part-time, residential, and subsistence farms 
increased approximately 200,000 from 1929 to 1954. Thus, the 1.5 mil- 
lion farms (about 65,000 per year) have been absorbed into active farms. 
The average size of all farms increased from 157 acres in 1929 to 242 
in 1954, an increase of over 50 percent, with most of this taking place 
since 1940. The average size of commercial farms increased over 50 
percent from 220 acres in 1940 to 336 by 1954. 

Land substitution. Resources possess varying degrees of substi- 
tutability in production. Capital, labor, technology, and management 
may be considered as substitutes for land in producing a given output. 



L Changes in Farm Production and Efficiency, USDA Stat. Bui. 233, Washington, D. C, 
Revised July, 1960, pp. 20-21. 



180 JOHN C. REDMAN 

Fertilizers are of great importance and can become a very impor- 
tant substitute for land, should farmers elect to hold output and other 
variables constant. No doubt fertilizer has played an important part in 
maintaining a high level of crop output in spite of the decline in crop- 
land in the New England and the southeastern states. Assuming a fixed 
acreage, farmers obtain the highest net return when they distribute 
their expenditures so that the marginal value productivity of each unit 
of input is the same and is also equal to the prices of the units of input. 
Farmers have clearly found that the marginal value productivity of fer- 
tilizers is very high while its costs are relatively low. As a result, the 
use of fertilizers in the United States has expanded rapidly, increasing 
from 1.7 million tons of plant nutrients in 1940 to 6.2 million tons in 
1957, or 368 percent of the 1940 level. 2 However, most estimates indi- 
cate that rates of application are still far below the level that would be 
most profitable in many areas, i.e., under usual cost- productivity con- 
ditions. 

The greatest increase in the use of fertilizers has occurred in the 
North Central states, increasing from 252 thousand tons of nutrients in 
1940 to 2,331 thousand tons in 1957, or 925 percent of the 1940 level, 
with the western portion of this area making the fastest gain. In the 
Corn Belt, estimates are that the rate of application could be economi- 
cally increased by two to three times the amount applied in 1954 under 
reasonable corn-fertilizer price relationships. With large farm units, 
high levels of capital investment in equipment, and the good levels of 
management existing in these states, fertilizer use could reasonably be 
expected to be highly productive, particularly in irrigated areas. 

A rapid increase in fertilizer use occurred also in the Mountain and 
Pacific states, reaching a high of 702 percent of the 1940 level in 1957. 
In 1940 only 85 thousand tons of plant nutrients were used. Fertilizer 
and water substitute for each other at a diminishing rate in farm pro- 
duction, and since water is the limiting factor, it has been economically 
feasible to use larger quantities of fertilizer not only to maintain but to 
increase the output. 

The New England states experienced the least increase in the use of 
fertilizer of any geographic area, reaching a high of 158 percent of the 
1940 level in 1949 but declining to 142 percent in 1957. The Middle At- 
lantic and South Atlantic states also made a relatively slow gain over 
the 1940 level of 888 thousand tons of plant nutrients, reaching a high of 
215 percent of that level in 1955. However, these states have for many 
years made heavy use of plant nutrients. In the East South Central 
states, fertilizer use increased by 1957 to 277 percent over the 1940 
level, while in the West South Central states it rose to 612 percent. 

These regions with a smaller rate of increase of fertilizer use over 
the 1940 level apparently had a much more narrow gap between the 
marginal value product of fertilizer with respect to corn and the price 



2 W. Scholl et al., Consumption of Commercial Fertilizers and Primary Nutrients in the 
U. S., ARS, USDA, Washington, D. C, fiscal years 1946-58; Changes in Farm Production 
and Efficiency, op. cit. 



ADJUSTMENTS AND CAPITAL USE 181 

of fertilizer than had the Corn Belt. However, the gap in the Corn Belt 
area appears to be narrowing. Also, the relative changes that have 
taken place may also indicate that the marginal value productivity of 
fertilizer with respect to the crops of the Southeast may be closer to 
the price of fertilizer than that of the crops in the Corn Belt. 

Pesticides, which include insecticides, fungicides, and herbicides 
have contributed greatly to increased production by preventing crop 
destruction. While they are not considered growth- producing resources, 
they must occupy an important role in making other resources more 
productive. Thus, pesticides may become very productive and a fairly 
important substitute for land in achieving a given level of output. 

Farm labor adjustments . In the major part of the agricultural econ- 
omy, labor is the chief single input. Priced at market wage rates, labor 
has a greater value than the annual services of land or other capital 
items. Labor has made up a decreasing percentage of total farm inputs 
since 1940, accounting for about 45 percent of total inputs in 1947-49 
and dropping to about 30 percent in 1958. Labor in agriculture is more 
dispersed than in any other industry and is mostly furnished by farm 
operators and their families. One of its most valuable properties is 
flexibility of use. Many farm families can have a desirable level of in- 
come only if the productivity of labor can be increased. 

Productivity of labor depends upon the level of other resources. In 
general, areas of low labor productivity are those of high capital pro- 
ductivity since labor is used in large quantities relative to capital. An 
increase in the amount of capital used with existing labor in areas of low 
productivity would increase the returns to the labor and lower the re- 
turns to capital. A reduction of the labor force because of the decrease 
in the labor- capital ratio would have the same effect. Both types of ad- 
justments have been taking place. 

Farm labor efficiency has been increasing since the country was 
settled, but the greatest gains have been made since 1910. Man-hours 
per crop acre have decreased steadily since 1942, reaching a low of 56 
percent of the 1940 level in 1957. 3 During the 1950*8 the decline aver- 
aged close to 4 percent per year. All geographic divisions except the 
western states (Mountain and Pacific regions) have paralleled closely 
the changes for the United States. The quantity of labor used in the 
western region declined, but at a slower rate, reaching a low of about 
80 percent of the 1940 level by 1950. 

While the labor input declined, the total farm output increased stead- 
ily, reaching 136 percent of the 1940 level in 1957. 4 In the 1950*8 pro- 
ductivity rose over 2 percent annually as compared with 0.5 percent in 
the 1920 , s. Increases in crop yields have been the major source of the 
big increase in farm output, with yield increases ranging from 20 to 75 
percent in the 1950's. The yield of corn, which accounts for a fourth of 
total crop production, increased by about 35 percent. Little improvement 



3 Changes in Farm Production and Efficiency, op. cit., pp. 36-39. 

4 Ibid. 



182 JOHN C. REDMAN 

in feeding efficiency, except in broiler production, has occurred since 
1947. Output of broilers per unit of feed has increased by about 40 per- 
cent. The farm output of the eastern states (New England and Middle 
Atlantic) and the southeastern states (South Atlantic and South Central) 
has not kept pace with that of the nation, while the North Central states 
and the western states have exceeded the national average, with the 
western states reaching 166 percent of the 1940 level by 1958. 

The output per man-hour increased steadily to 204 percent of the 
1940 level by 1957 due primarily to the declining quantity of man-hours 
used and to an increased quantity of other resources or resource ad- 
justments caused mainly by improved technology. 5 The output per man- 
hour in all geographic areas paralleled very closely the national aver- 
age, except for the North Central states which increased at a faster 
rate, particularly after 1947. 

Labor substitution. Labor productivity and farm incomes are highly 
dependent upon the amount of capital available. This means that capital 
will not substitute for labor at a constant rate. In many areas, an aver- 
age farm family with a small quantity of capital cannot obtain a return 
from their farm comparable to that which could be earned if their re- 
sources were paid the market value in other uses. 

Capital investment per farm worker averaged $20,651 in 1959, or 
605 percent of the 1940 level. 6 This increase was due partly to a small 
increase in quantity, but mostly to rising prices of farm assets — par- 
ticularly real estate— and a decrease in numbers of farm workers 
(Chapters 6 and 7). Of this investment, machinery increased at a faster 
rate, reaching 948 percent of the 1940 level in 1959. The number of 
tractors on farms in 1959 increased to 303 percent of the 1940 number. 7 
Together with tractors, increased investments were made in comple- 
mentary equipment and farm trucks. Also, farmers have been purchas- 
ing nonfarm inputs which, when combined with labor, made their labor 
more productive. As a result, the number of people supported by a 
farm worker in 1959 increased to 220 percent of the 1940 level, indi- 
cating a considerable increase in farm worker efficiency. 8 

Capital adjustments . Capital investments are not inputs in the sense 
that they are immediately used up in production. They give services 
which vary in degree of exhaustibility (Chapters 2 through 5). To attain 
optimum levels of productivity in farming, it is important that the quan- 
tity of capital be adequate both in relation to the labor supply and other 
inputs and that the kinds of capital be in correct proportion for the level 
and type of production. 

Real estate comprised more than 70 percent of the total value of 
physical farm assets in the United States in the 1950*8 (Table 6.1). In 
1940 real estate comprised 75.5 percent of the total value of these as- 
sets; machinery, 7 percent; crops, 6 percent; and livestock, 11.5 percent. 



Ibid. 

Agricultural Outlook Charts, AMS, USDA, Washington, D. C, 1960, Table 34, p. 57. 
Changes in Farm Production and Efficiency, op. cit., p. 33. 
"Ibid., p. 44. 



ADJUSTMENTS AND CAPITAL USE 183 

By 1959 this asset mix shifted, with real estate decreasing slightly to 
73 percent, machinery rising to 10.8 percent, crops decreasing to 5.5 
percent, and livestock decreasing to 10.6 percent of the total value. The 
asset mix differs greatly between commercial and subsistence agricul- 
ture, especially when the various commercial types of farming are con- 
sidered. 

The real estate portion of the northeast dairy farms constituted 
about 50 percent of the total invested in the 1950 , s, whereas on Kentucky 
tobacco- livestock farms it made up about 80 percent of the investment. 9 
In general, the proportion of total investment in real estate did not in- 
crease greatly during the 1950*8, although the Corn Belt hog-beef fat- 
tening area and the New Jersey poultry area did show substantial in- 
creases. Most of the adjustments over the 1950's in the asset mix 
occurred in machinery, livestock, and crops. In almost all of the com- 
mercial farming areas, the proportion of the total capital investments 
allocated to machinery increased. 10 In the peanut-cotton area, machinery 
increased from 7.5 percent of the total investment in 1948 to 17.9 in 
1958, with most of this increase occurring before 1954. The New Jersey 
poultry farms showed only a very slight increase in the machinery pro- 
portion during the same period of time. This increase of machinery 
came at the expense of livestock and crops. The capital investment in 
livestock and in crops on Piedmont cotton farms decreased from 8 and 
5 percent of the total in 1948 to 4.2 and 2.3, respectively, by 1958. u 
Similar but less drastic changes occurred in other commercial farming 
areas. 

The increase in proportion of machinery of the asset mix indicates 
that commercial farmers are increasing the productivity of their labor 
input by improving the labor- capital ratio. Also, the price of farm 
labor has encouraged a shift to more machinery. 

Capital substitutes . Scientific and technological advances over the 
1950's affected the productivity of land and labor (Chapters 4, 6, and 7). 
In one sense, science and technology constitute a form of capital when 
combined with management that is essential for modern commercial 
farming. The scientific and analytical mind which can view the varied 
phenomena confronting a farming operation and formulate decisions 
with a minimum of error is an excellent complement to the other re- 
sources involved (Chapters 20 and 21). A great deal of evidence points 
to a trend toward a higher level of formal education for highly com- 
mercialized farming and less reliance upon custom and tradition as a 
basis for decision- making. Woodworth and Fanning develop this point 
in Chapter 23. 



9 Farm Costs and Returns, Commercial Family-Operated Farms by Type and Location, 
USDA, Info. Bui. 176, Aug., 1959. 

10 Ibid. 

11 Farm Costs and Returns, Commercial Family-Operated Farms by Type and Location, 
op. cit. 



184 JOHN C. REDMAN 

Enterprise Adjustments 

Specialization of production represents an adjustment to the prevail- 
ing physical and economic factors that influence land use. The degree 
of specialization depends on (1) the nature of the relationship of produc- 
tion possibilities, which in turn depends on the nature of the production 
function for each product, and (2) the price ratios of the products. Any 
forces which cause changes in price relationships or the nature of pro- 
duction possibilities can change the pattern of production. Enterprise 
adjustments can and do take place on the farm, within and among re- 
gions and among nations. A major shift in location of cotton production 
in the United States has taken place over the years since about 1930. 
The cotton acreage of the South has decreased from 43 million acres in 
1929 to 17 million acres in 1955, while the three western cotton-growing 
states increased the cotton acreage from 645,000 to 1,498,000 in the 
same period. 

The extension of speedy, refrigerated transportation equipment pro- 
vided an opportunity for many areas to increase the output of vegetables. 
The substantial increase in the consumption of frozen vegetables since 
1940 came at the expense of some other products, and the impact on the 
supply areas and market structure is obvious. Since 1940, the location 
of vegetable production has shifted significantly to the western states, 
particularly California. The western area has doubled its production, 
and the only other region to increase at a faster rate than the national 
average was the South Atlantic area. The South Central states main- 
tained their proportion of the total output, while the North Atlantic and 
North Central regions increased production at a slower rate. The big- 
gest increase in vegetable production occurred in three states producing 
for specialized outlets — Florida for fresh market, Wisconsin for can- 
ning, and California for both fresh and processing outlets. 

Changes in per capita consumption of some farm commodities will 
force enterprise adjustments. For example, per capita consumption of 
cotton decreased from 30 pounds in 1940 to 22.2 pounds in 1958, and 
sweet potatoes from 16.2 to 6.6 pounds, while per capita consumption of 
processed frozen vegetables increased from 1.2 to 15.4 pounds during 
the same period. Many other adjustments which gave rise to major en- 
terprise adjustments, not only within the farm unit but both within and 
among regions, have taken place in consumption since 1940. 



FINANCIAL AGRICULTURAL ADJUSTMENTS 

Credit agencies were among the first to feel the impact of the ad- 
justments occurring within agriculture. Lower farm incomes led to 
many of the adjustments to improve farming efficiency. As the degree 
of commercialization and specialization continue to increase, more cap- 
ital will be needed to finance resource acquisition. Farm enlargements, 
machinery, and other nonfarm production goods, such as fertilizers, 



ADJUSTMENTS AND CAPITAL USE 185 

insecticides, gasoline, etc., have contributed to the increased use of 
borrowed capital to supplement the farm -generated capital and the cap- 
ital obtained through leases. However, the large number of small 
farms, many with limited managerial input, which are found extensively 
in the South, presents serious credit problems for regular credit agen- 
cies (Chapters 14 and 23). These conditions are conducive to the devel- 
opment of contract farming where management and capital are provided 
in combination with the farmer's labor and land, as was shown by Jones 
and Mighell in Chapter 8. It has been said frequently that most farmers, 
except those with very low incomes, can obtain all the credit they are 
willing to use for making adjustments. Internal rationing of credit is 
probably the major obstacle to financing such adjustments. Coutu and 
Lindsey discuss this problem in Chapter 21. 



Real Estate Mortgage Debt 

Capital requirements to enlarge the size of farming operations by 
means of adding acres, and to finance purchases of real estate from 
those who leave farming, have increased since 1947. 12 Hathaway and 
Murray present detailed data on this subject in Chapters 5 and 11 
(Tables 5.1 through 5.5). Over 40 percent of the purchases in 1958-59, 
as compared with 20 percent in 1950, were for the purpose of adding 
land to existing farms. The western two- thirds of the United States is 
most affected. In the western cotton area, 60 percent of the farm land 
purchases in 1959 were for farm enlargement as compared with 24 
percent in 1949. From 1940 to 1947 the real estate debt declined to 69 
percent of the 1940 level, apparently due to high incomes and limitations 
of consumption and production resources imposed by World War II. The 
farm mortgage debt in New England, West North Central, East South 
Central, and Mountain states decreased considerably more than the 
national average, with the East South Central region reaching a low of 
46 percent of the 1940 level in 1946. The debt in the South Atlantic re- 
gion reached a low of only 91 percent in 1946 and a high of 245 percent 
of the 1940 level in 1958. Two other regions— East South Central and 
Mountain— which had a relatively low real estate debt in 1946, in- 
creased loans at a faster rate than the nation as a whole, reaching 205 
and 222 percent, respectively, of the 1940 level in 1958. The New Eng- 
land and West North Central regions, which has decreased the debt to 
57 percent of the 1940 level, rose only to 109 and 116 percent of that 
level in 1958. 

Prior to 1940, the federally sponsored agencies held large amounts 
of the farm mortgage loans, but since then, particularly 1942, the 
amount held by these agencies declined substantially. Mortgage hold- 
ings of the Federal Land Banks decreased to 37 percent of the 1940 



12 Agricultural Finance Review, ARS, USDA, Washington, D. C, Vols. 1-21, 1938-1959. 
See also Current Developments in the Farm Real Estate Market, ARS, USDA, Washington, 
D. C, Oct., 1959. 



186 JOHN C. REDMAN 

level in 1950, but had increased to 73 percent by 1958. Only the Moun- 
tain region had increased the real estate debt above the 1940 level by 
1958. Changes in standards used in determining normal agricultural 
values and on- the- dollar limit will have some effect on the amounts 
loaned, but the 65 percent limit and conservative policies may make it 
difficult for the Land Banks to regain their prominence. 

Life insurance companies have replaced the Federal Land Bank as 
the chief institutional lender. In 1940 Federal Land Banks held over 37 
percent of the total real estate loans as compared with 13 percent for 
life insurance companies. By 1958 life insurance companies held 25 
percent of the total as compared with 18 percent for the Federal Land 
Banks, and had increased the total amount held to 292 percent of the 
1940 level. Recently they have been very active in the Northeast and 
in the western states. 

Individuals have for many decades constituted the most important 
source of credit for real estate purchases. In 1940 this group held 49 
percent of the total debt, and by 1958 their holdings had increased to 54 
percent. This group has served a very useful function because they 
have provided credit when the traditional institutional patterns have 
failed to do so. The southeastern states have made more use of this 
group than other areas, reaching over 300 percent of the 1940 level in 
1958 as compared with 167 percent for the nation. 

The rapidly expanding industrial economy and greater urbanization 
of the population will place heavy demands on the anticipated savings 
for investment purposes. On the other hand, pressure can be eased 
considerably by the rapidly increasing use of the sales contract. This 
type of low equity financing was used widely during the 1950's in the 
North Central region. Also, commercial banks are becoming increas- 
ingly more active in this field, although their potential appears to be 
somewhat limited for long-term financing (Chapters 13, 15, and 16). 



Nonreal Estate Debt 

Adjustments in size of operations are also financed by borrowing 
for the nonreal estate items of production, although a large portion of 
these items are farm financed. Much of the borrowed capital for such 
short-term purchases is secured by chattels on crops, livestock, and 
equipment, and is therefore influenced greatly by the character and 
ability of the borrower. 

All agricultural regions increased in the use of nonreal estate 
credit to about the same degree. The credit provided by the Production 
Credit Associations has increased rapidly since 1955, but commercial 
banks still provided approximately 75 percent of this type of credit in 
the United States in 1959. However, the amount held by lending groups 
varies from state to state and from region to region, depending upon 
the institutional restrictions. Bank credit, for example, accounted for 



ADJUSTMENTS AND CAPITAL USE 187 

87 percent of the nonreal estate debt in Arizona in 1959, but only 48 
percent in Louisiana. 13 

Installment credit has been used fairly successfully for medium- 
term investments, and in some areas farm credit unions have made 
significant headway. Merchant credit of some form has been used in 
substantial quantities and promises to increase, particularly if con- 
tract farming and the present interest rates continue (Chapter 11). 
Often a credit subsidiary of a retail store will show greater profits 
than the parent firm. This development will push farm financing away 
from the local sources and place it in the hands of absentee financiers. 
One of the principal developments in nonreal estate loans is the in- 
creasing need for longer maturities for loans, commonly called 
intermediate- term loans, for capital improvements. Diesslin presents 
the case for such a development in Chapter 13. 



Productivity of Capital in Agriculture 

The productivity of a resource in various uses in relation to its 
cost determines how much of that resource will be used. The produc- 
tivity of capital invested in agriculture declined rather sharply during 
the 1950's. Capital investment per farm worker increased rapidly, 
while net farm income fell, resulting in a rapid decline in the net in- 
come per dollar invested. The net farm return per dollar invested for 
the nation in 1951 was 19 cents, but declined to a low of 10.7 cents in 
1957. 14 In the southeastern states where capital investments have been 
traditionally low, the net income per dollar invested has been the high- 
est of any area in the nation. The western states have had the lowest 
net income per dollar invested. 

During the 1940's and '50's about 75 percent of the farm assets 
were in the form of real estate and 25 percent in nonreal estate. The 
proportion of capital borrowed ranged from about one-fourth in 1940-41 
to a low of about one- tenth in 1946-49, but was fairly constant at 14 per- 
cent after 1954. A large portion of the capital used by farmers, possi- 
bly 20 percent, has been "borrowed" under leasing arrangements with 
nonfarmers. The borrowed capital plus leased capital comprised about 
30 percent of the total assets coming from external sources. When all 
purchased inputs are valued at their market cost, and other inputs such 
as owned capital and labor at their opportunity cost, the residual, when 
allocated equally between labor and owned capital, showed a downward 
trend (Figure 10.1). The rate of return for all capital used exceeded 
the interest rate paid on borrowed capital until 1954. After that, the 
rate fell to 3.5 percent, which is below the interest rate. Thus, part of 



13 J. Z. Rowe, "Sources and growth of agricultural credit," Business Rev., Vol. 44, 
No. 11, Nov., 1959. 

14 Calculated from data found in The Farm Income Situation, AMS, USDA, Sept., 1959 and 
Current Developments in the Farm Real Estate Market, op. cit. 



188 



JOHN C. REDMAN 



Rate of return 
(percent) 



15 


1 \ 

1 \ 
1 \ 


ft 






13 




1 • 
/ 1 

/ \ Real estate 
i i capital 






II 


1 1 \\ 


» / \ . 

1 /v / \ * 






9 


I \ 

II \ 

II 
II 
II 
If 


' '/ ^^/ \ ' 

\\ y All capital \\ ,'*' s \ 






7 




\ * 

\ \ 






5 






vttt^T-^' 


a 
\\ 

• 


3 


1 1 1 


i i i i i i i i i i i 


i i i 


i i 



1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 

Source: William H. Scofield, "Returns to productive capital in agriculture," Cur- 
rent Developments in the Farm Real Estate Market, ARS, USDA, Feb., 1960. 

Fig. 10.1. Changes in rate of return on market value of capital used in farm 
production, U. S. 

the return (opportunity return) to family labor and owned capital must 
be used to pay the cost of borrowed capital. 15 

When the operator and family labor and nonreal estate capital are 
paid at their cost, the residual— which is the return to real estate capi- 
tal valued at current values— also shows a decline, following the pat- 
tern of return to all capital (Figure 10.1). It seems that sufficient 
pressure will be exerted to reduce the rate of increase in land values 
and to bring about an adjustment in the land return- market value ratio. 



15 William H. Scofield, "Returns to productive capital in agriculture," The Farm Real 
Estate Market, ARS, USDA, Washington, D. C, Feb., 1960. 



Discussion 



JOHN BLACKMORE * 

Change seems to be the only constant in American agriculture. 
Redman presents the main elements of this process of change. The 
essence of this change seems to be the continual adjustment of the fac- 
tor mix by entrepreneurs as they pursue a profit- maximizing position. 
Confronted by changes in product and factor markets and offered im- 
provements in production technologies, American farmers seem to 
show less and less reluctance to alter their production combinations. 
American farming has moved very far from the traditional peasantry 
model of a farm as a relatively fixed combination of land and human 
labor. The farmer has come to treat more and more of his productive 
resources as variables. Who knows but what we are approaching a 
time when farming decisions may really be made on the basis of an 
equilibration of marginal costs and returns? 

In addition to the factors discussed by Redman, there is a growing 
significance in two other factors. The first of these is social capital, 
or public investment. In the Tennessee Valley public investment has 
produced both public controversy and economic good. I would suggest 
that public development of a source of cheap electric power does affect 
decisions as to location of some kinds of industrial plants and thereby 
contributes to economic development. Also, the impact of an improved 
waterway on the pattern of agricultural output should be noted. Feed 
grains move in very large quantities down the Mississippi River and 
up the Tennessee River to ports in northern Alabama. The grain is 
then trucked to poultry production centers in Georgia and Alabama 
from these ports. The impact of the Georgia broiler industry is well 
known, particularly in the Northeast. It would seem that the improve- 
ment of the Tennessee River has given the Georgia and Alabama poultry 
producers a real economic advantage over producers in some other 
parts of the country. 

Another kind of public investment is less direct, but equally effec- 
tive. This is the very large investment which this country has made in 
technical education. We take for granted that we can have a large crop 
of technicians available not only to carry on agricultural research, but 
also to provide a personal advisory service to farmers. We also take 
it for granted that a high school education is commonplace and that 
many farmers have the benefit of some college training in agriculture. 
We should contrast our situation with the rest of the world, where this 
process of social investment is only just starting. In the late 1950's in 
the Ministries of Agriculture of three countries in the Far East— Viet- 
Nam, Cambodia, and Laos — there was a total of nine men who had 



♦Head, Department of Agricultural Economics, University of Massachusetts. 

189 



190 JOHN C. REDMAN 

college degrees in agriculture. What kind of program of private invest- 
ment in agriculture is practical where such a situation prevails? What 
can one recommend in the way of private capital use in the agriculture 
of southern Italy, Morocco, or fifty other countries where most farmers 
are either illiterate, or at best have access to four years of schooling? 

The capitalization of agriculture should be viewed also in light of 
another process of change. For many years there has been a gradual 
transfer of elements of the production process away from the farm. In 
1959 the ultimate consumer received a product which was the result of a 
whole series of production processes and to which the primary producer, 
the farmer, made only a relatively small contribution. We are wit- 
nessing a growth of efforts to give centralized management to sets of 
these processes. To some extent this integration is under the control 
of farmer-producers through cooperatives. A large part of it, however, 
is controlled by large corporate firms with ready access to large sums 
of investment capital. The result is that a new channel for farm invest- 
ment has been opened, but it is one which may have profound changes 
on the nature and the organization of farming. 

RAYMOND J. DOLL* 



Considerable emphasis is placed on the fact that the trend has been 
for farmers to substitute capital inputs for labor inputs. Redman em- 
phasizes the point that productivity of labor depends upon the level of 
other resources that are combined with the labor inputs. He also points 
out that, "To attain optimum levels of productivity in farming, it is im- 
portant that the quantity of capital be adequate both in relation to the 
labor supply and other inputs and that the kinds of capital be in correct 
proportion for the level and type of production. " With a substantially 
more rapid rate of increase in the price of labor than in prices of other 
inputs, and the prevailing stock of technology that existed, farmers 
were encouraged to make these capital substitutions. Considerable 
emphasis is placed upon the fact that any forces which cause changes 
in price relationships or the nature of production possibilities can 
change the pattern of production and, thus, the types of inputs that are 
used. 

Commercialization and specialization are expected to continue in 
the future. These developments almost certainly will result in a con- 
tinuation of the trends toward farm enlargement, mechanization, and 
the use of larger quantities of nonfarm production goods such as fer- 
tilizers, insecticides, electricity, fuel, and biologicals. 

Thus, in the future, institutions financing farmers probably will be 
called upon to make a larger total amount of credit available to a 
smaller number of farmers. This will create additional problems for 
many financial institutions. For example, the size of loan that commer- 
cial banks can make to an individual is controlled by federal and state 



K Agricultural Economist, Federal Reserve Bank of Kansas City. 



DISCUSSION 191 

banking regulations. Many banks do not have adequate capital structures 
for making the size of loan that is needed by our larger commercial 
farmers. This problem will become more difficult, and banks need to 
give thought to methods for solving it in the most satisfactory manner. 
Although other agencies may not have such limiting legal restrictions, 
they must be careful not to lend too large a proportion of their total 
assets to any one individual and, thus, subject themselves to potential 
financial difficulties. 

Much emphasis has been placed upon the importance of making more 
credit available to farmers on a so-called intermediate- term basis. 
This implies that the need for intermediate- term financing is growing 
more rapidly than is that for financing as a whole. Although the need 
for intermediate- term credit probably is increasing, the rapid rate of 
increase in use of such production items as fertilizers, insecticides, 
electricity, fuel, machinery rental, and purchased feed suggests that 
the need for short-term financing is growing at an even more rapid 
rate. Regardless of the relative rates of growth in the different kinds 
of capital requirements, the important consideration in financing is that 
the credit extended be tailored to the requirements of the production 
plan and that financial institutions keep pace with the changing needs 
dictated by changing technology. This consideration is developed in 
more detail in Part HE. 

Redman states that in 1958 commercial banks provided 75 percent 
of the total nonreal estate credit; production credit associations, 16.5 
percent; and the Farmers Home Administration, 2 percent. These data 
indicate that these agencies provide for 93.5 percent of nonreal estate 
credit and other sources the remaining 6.5 percent. According to data 
available, other sources were more important providers of nonreal es- 
tate credit. Data from the American Bankers Association and the Bal- 
ance Sheet of Agriculture indicate that at the beginning of 1959 commer- 
cial banks provided 45 percent of the nonreal estate credit outstanding; 
individuals, merchants, and dealers, 37.8 percent; Farm Credit Admin- 
istration, 12.9 percent; and Farmers Home Administration, 4.3 percent. 



PART III 

Credit Market and 
Institutions 

► Credit Supplies — Present and Future 

► Relationship to Commercial and Low-Income 

► Evaluation 

► Suggested Improvements 



Chapter 1 1 



WILLIAM G. MURRAY 

Iowa State University 



Farm Credit Institutions 



FOLLOWING THE FINANCIAL CRISIS on farms in the early thir- 
ties, far-reaching changes were made in our agricultural credit in- 
stitutions and methods. What has been the result of these changes 
and how well has our farm credit system functioned since? 

First on the list for critical evaluation are the credit institutions 
themselves, both operating and real estate loan agencies. What has 
been happening to these institutions and in what direction are they mov- 
ing? Second, how well have these agencies been meeting the financial 
ups and downs of the farmers, especially the difficult times that 
farmers have been having during the squeeze of rising costs and falling 
or stationary returns? Finally, what progress, if any, has been made 
in more efficient handling of farm credit and in lower loan costs? 
Tootell addresses himself to similar questions in Chapter 17. 



CREDIT INSTITUTIONS 

Farm credit has increased substantially since the thirties, and the 
agencies extending the credit have improved their types of loan service 
to farmers. However, further improvement in loan services is 
needed. This subject is also discussed in Chapters 13, 15-18. In dis- 
cussing these developments, operating credit agencies will be consid- 
ered first, followed by real estate or farm mortgage agencies. 



Institutions for Operating Credit 

Commercial banks are the most important source of operating 
credit for farmers. While the Production Credit Associations and the 
Farmers Home Administration are of lesser importance, there is a 
host of merchants (including equipment, fertilizer, feed, and fuel 
dealers), as well as private individuals, who also provide farmers with 
operating credit. But these merchants and private individuals are not 
organized as credit institutions, and consequently are not discussed in 
this chapter. (Some aspects of credit extension by farm supply agen- 
cies are discussed in Chapters 8 and 26.) Nevertheless, they should not 
be overlooked in any over -all treatment of the farm credit problem. 

195 



196 



WILLIAM G. MURRAY 



Table 11.1. Operating Credit to Farmers by the Major Credit 
Institutions Outstanding on January 1, in Selected Years 



Credit Institutions 


1939 


1946 


1953 


1960 






(million dollars) 




Commercial Banks 
Production Credit Associations 
Farmers Home Administration 


789 
147 
351 


1,034 
195 
413 


3,195 
599 
348 


4,819 

1,361 

397 


Total 


1,287 


1,642 


4,142 


6,577 






(percent of total) 




Commercial Banks 
Production Credit Associations 
Farmers Home Administration 


61 
12 
27 


63 
12 
25 


77 

14 

9 


73 

21 

6 


Total 


100 


100 


100 


100 



Source: Based on data supplied by the Agricultural Research Service, USDA. 



A comparison of the operating farm credit outstanding by agencies 
is presented in Table 11.1. Commercial banks have provided a major 
share of the additional operating credit to farmers. Since the end of 
World War II, commercial banks have increased their production credit 
advances (based on amounts outstanding January 1 of each year) by 
3.8 billion dollars. Commercial banks on January 1, 1960, had over 
six times the total advanced as of January 1, 1939. It is interesting to 
note that the commercial banks not only increased their farm produc- 
tion loans in the 1946-53 period, but also in the 1953-60 period. In the 
single year ending January 1, 1960, loans extended by these banks in- 
creased by 658 million dollars. 

Production Credit Associations, created by Congress in 1933, had 
147 million dollars in outstanding loans on January 1, 1939. By the end 
of World War II their loan total had increased to 195 million dollars. 
In the next fifteen years, PC A loans increased rapidly. On January 1, 
1960, total outstanding PCA loans amounted to 1.36 billion dollars. This 
amount was greater than the commercial banks had outstanding on Jan- 
uary 1, 1946. On January 1, 1960, the Production Credit Associations 
had about one -fifth of the total operating credit advanced by the three 
main types of farm credit agencies. It is significant that the PCA's 
had their largest percentage increase during the 1953-1960 period. 
This is the period in which the "cost -returns squeeze" hurt the farmer 
most. The banks extended additional credit, and so did the PCA's. If 
the banks should find it difficult to continue expanding, the PCA's are 
available. This is a natural situation since banks have a primary obli- 
gation to their depositors and may find it necessary at times to curtail 
their loans in order to provide adequate reserves behind their deposits. 

The Production Credit Associations do not have deposits; they ob- 
tain their funds for lending from the Federal Intermediate Credit 
Banks, who in turn get the funds from the central money markets on 



FARM CREDIT INSTITUTIONS 197 

short-term debenture bonds or notes. This gives the PCA's a continu- 
ous open line of credit to extend to farmers as long as the Federal In- 
termediate Credit Banks can borrow from the central money markets. 

Thus, in the commercial bank-PC A combination, the farmer is as- 
sured of credit as long as funds are available in the money markets, 
and there are few times that funds cannot be obtained in the money 
markets on securities with a reputation as good as that enjoyed by the 
Intermediate Credit Bank debentures. But in order to make this com- 
bination operate smoothly, the PCA's have to assume an obligation to 
fill in the gap wherever and whenever commercial banks find their 
funds loaned to capacity. Since PCA's cover the entire nation, it is ob- 
vious that the combination of available credit at all times can work if 
the PCA's are willing to take up the slack left by the commercial banks. 

An interesting phase of the Production Credit Associations' activi- 
ties is the relatively large business in the South. There are two states, 
South Carolina and Florida, where Production Credit Associations had 
more operating loans outstanding on January 1, 1959, than the commer- 
cial banks. The four states having the largest and the four having the 
smallest percentage of PCA loans in comparison with the commercial 
banks are presented in Table 11.2. All of the "high percentage PCA 

Table 11.2. PCA Operating Loans Compared in Percentage Terms 

With Total Operating Loans of PCA's and Commercial Banks, 

January 1, 1959 

Largest percent Smallest percent 



South Carolina 


56 


Florida 


52 


North Carolina 


46 


Mississippi 


44 


U. S. Average 


20 



Iowa 
Arizona 
Nebraska 
California 


7 

7 

10 

12 


U. S. Average 


20 



Source: Farm Credit Administration, Washington, D. C. 

states" are in the South and east of the Mississippi River. All of the 
"low PCA states" are in the West. Part of the explanation for this sit- 
uation is that the small loans in the South are not actively sought by the 
banks. For example, the average PCA loan in South Carolina in 1958 
was $3,150, while the average size in Iowa was $16,500. But this is not 
the only reason, as indicated by the average PCA loan of $10,900 in 
Florida. Actually the PCA has an advantage because it can take larger 
loans than many commercial banks. 

Another aspect of the nature of PCA loans is provided by examining 
the percentage of farmers served by the PCA's (Table 11.3). Iowa is 
the only state which appears low in both the PCA-bank comparison and 
the percentage of farmers served. Contrary to what might be expected, 
West Virginia and Alabama— both southern states—rank low on the list, 
while the high percentage states include eastern and western states not 
present in the states having a high percentage of PCA credit as 



Vermont 


15 


Montana 


12 


Idaho 


12 


Delaware 


11 


U. S. Average 


6 



198 WILLIAM G. MURRAY 

Table 11.3. Estimated Percentage of Farmers Using PCA Credit, 
January 1, 1959 

Four high states Four low states 

(percent) (percent) 

West Virginia 2 

Alabama 3 

Iowa 3 

Wyoming 3 

U. S. Average 6 

Source: Farm Credit Administration, Washington, D. C. 

compared to commercial banks. Information on credit supplied by 
merchants and dealers is needed to explain this situation. This type 
of credit is especially important in the South. Although the PCA's pro- 
vide more credit than do banks in South Carolina and Florida, they ac- 
tually reach only an estimated 7 percent of the farmers in South Caro- 
lina and 6 percent in Florida. Consequently, both the banks and the 
PCA's have much room for expansion. 

Farmers Home Administration loans have remained relatively con- 
stant since 1939, actually declining slightly since the peak in 1946 
(Table 11.1). These loans are of several different types. For example, 
emergency crop and feed loans made up a sizable part of the total in 
1939 and 1946, but in the years since have almost disappeared. In 1939 
there were 171 million dollars in these emergency crop and feed loans 
outstanding, while the total at the beginning of 1959 was less than 6 mil- 
lion dollars. On the other hand, operating loans made by the FHA were 
up from 169 million in 1939 to 340 million in 1959. 

The increase in operating loans by the FHA is a major success in 
that it has demonstrated that supervised credit will work if restricted 
to operators who possess managerial ability. Part of the success, of 
course, is due to the quality of the supervision. When it is recognized 
that the borrowers of the FHA operating loan have to be turned down by 
a commercial bank or a Production Credit Association before they are 
eligible, it makes the good repayment record on these loans stand out 
as one of the achievements in farm credit. It is this achievement which 
points the way to what may be one of the newer developments in farm 
credit among banks and Production Credit Associations, namely, the 
development of the "farm management" loan (cf. Chapters 13, 15, 
and 16). 

Evaluation of institutions for operating credit. Farmers are well 
supplied with operating credit institutions. Commercial banks which 
offer checking account services and a variety of other banking facilities 
in addition to loans top the list in number of units and in amount of 
credit provided. Production Credit Associations which cover the entire 
country are in a position through their Federal Intermediate Credit 
Banks— which they are in the process of taking over— to provide a 



FARM CREDIT INSTITUTIONS 



199 



relatively continuous source of operating credit, and especially to serve 
when commercial banks for one reason or another are unable to provide 
farmers with the credit they need. The PCA's, which are cooperatives, 
offer the farmer an opportunity to participate in a credit organization 
to supply his own operating capital. Finally, for those farmers not able 
to get credit at either a bank or a PC A, the FHA is available with a 
short or intermediate operating loan. This is a supervised loan carry- 
ing a relatively low rate of interest. In addition, the FHA provides 
emergency and disaster loans. But most important, the FHA has dem- 
onstrated with its operating loans the successful use of supervision in 
making loans to farmers whose credit rating is below that accepted by 
commercial banks and PCA's. 



Real Estate Credit Institutions 

Insurance companies, Federal Land Banks, commercial banks, and 
the Farmers Home Administration, in this order, are the principal real 
estate mortgage lenders on agricultural land. The record of these 
agencies in the holding of farm mortgage loans is presented in Table 
11.4. 

Table 11.4. Farm Mortgage Holdings of Major Institutions Making 
Loans to Farmers on January 1, in Selected Years 



Credit Institutions 


1939 


1946 


1953 


1960 






(million dollars) 




Insurance Companies 
Federal Land Banks 
Commercial Banks 
Farmers Home Administration 


983 

2,863 

519 

10 


892 

1,319 

508 

185 


1,716 

1,095 

1,105 

268 


2,834 

2,357 

1,638 

449 


Total 


4,375 


2,904 


4,184 


7,278 






(percent of total) 




Insurance Companies 
Federal Land Banks 
Commercial Banks 
Farmers Home Administration 


23 
65 
12 


31 

45 

17 

6 


41 
26 
26 

7 


39 

32 

23 

6 


Total 


100 


100 


100 


100 



Source: Based on data from Agricultural Research Service, USDA. 



Insurance companies have increased their farm mortgage holdings 
almost three times since 1939. Since 1946 they have more than tripled 
their holdings. On the other hand, the Federal Land Banks have a 
smaller total than in 1939, but they have more than doubled their hold- 
ings since 1953. Commercial banks, like insurance companies, have 
more than tripled their holdings since 1946. 

The Federal Land Banks came out of the 1930's with large holdings 



200 WILLIAM G. MURRAY 

of farm mortgages because other lenders were not interested or were 
unable to lend extensively on farm real estate. Although Federal Land 
Banks do not have any government capital, they do have a public re- 
sponsibility in the farm mortgage field (cf. Chapter 17). Congress cre- 
ated these banks to lend solely on farm real estate, provided the origi- 
nal capital, and gave them generous financial support during the 1930's. 
If farmers should meet serious financial troubles again, Congress 
would undoubtedly see that the Federal Land Banks had the necessary 
support to keep farm mortgage credit flowing to deserving farmers. 

On the other hand, insurance companies adjust their investments in 
farm mortgages not to the needs of the farmers but to the current in- 
vestment policies of their companies. If they have large sums to invest 
and want more farm mortgages in their portfolios, they may expand 
their farm loans. But if they are short of investment funds or decide 
they want fewer farm mortgages, they may stop making farm loans, 
i.e., they have no obligation to make farm loans. However, insurance 
companies have been an excellent source of farm mortgage credit over 
the years, especially in the Midwest where large low-risk loans are 
available. Competition between insurance companies and other lenders 
for farm mortgage business has been of distinct advantage to farmers 
in areas where insurance companies have actively sought loans. 

Commercial banks are in somewhat the same situation as insurance 
companies. Their major responsibility, as noted previously, is to their 
depositors, secondarily to their short-term borrowers, and lastly to 
long-term borrowers— and this is as it should be. 

Another group of lenders, not shown in Table 11.4, are former farm 
owner -sellers who in the sale of their farms take a farm mortgage 
from the buyer as major payment for the farm. These lenders provide 
a valuable and outstanding service because they are able to adjust their 
terms to accommodate buyers. Many a farm buyer would not have been 
able to make the purchase had it not been for a seller who could lend a 
larger percentage of the purchase price than the insurance companies, 
Federal Land Bank, or commercial banks would lend. As for the FHA, 
there are limits on the funds it has available for direct loans, and in 
addition there are restrictions on the total amount it can lend to any one 
buyer, which prevents it from serving more than a small number of 
tenant purchasers. 

The Farmers Home Administration, however, does provide an un- 
usually fine loan service for the relatively few tenant buyers it is able 
to handle. As is evident in Table 11.4, it has been holding its own in 
extending about 6 percent of all the farm mortgage credit granted by 
major agencies. The FHA has set up a supervised purchase plan for 
both direct and indirect insured farm -ownership loans that has turned 
out to be much more successful than many expected. With the FHA 
making direct loans up to 100 percent and insured loans up to 90 percent 
of the purchase price, there were many predictions of failure for this 
high risk program in its early years. Two major policies, however, 
prevented these predictions from becoming fact. One was a limitation 



FARM CREDIT INSTITUTIONS 201 

on the funds for the 100 percent loans. With this restriction, the FHA 
was able to select those most likely to succeed from a large number of 
applicants. Secondly, the FHA held the appraisal and automatically the 
purchase price of the farm at a figure which was justified in terms of 
the estimated earning power of the farm. 

Evaluation of farm mortgage institutions. Here and in previous 
chapters it has been demonstrated that farmers are well supplied with 
farm mortgage agencies. The situation is much like that in the operat- 
ing credit field with one agency which can keep going in an emergency. 
In the operating credit field, it is the PCA, and in the farm mortgage 
field, it is the Federal Land Bank. Federal Land Banks, like PCA's, 
are not government agencies, but they were set up by Congress to cover 
the entire country and to provide credit at all times, especially during 
critical periods when other lenders are not able to satisfy all legitimate 
credit requests. 

Insurance companies, the largest lenders in the field, are a good 
source of competition even though they do not have an obligation or re- 
sponsibility of providing continuous service in any area. The Farmers 
Home Administration provides a relatively small amount of farm mort- 
gage credit, but it has been successful in this area with capable tenant 
buyers. 



LOAN SERVICE 

The big question in short- and intermediate -term lending is how to 
make "farm management" loans. There are still too many loans made 
to farmers strictly on a security basis. If the farmer has the livestock, 
the feed, the equipment, the lease, or the equity in his farm, he gets the 
loan. A "farm management" loan, on the other hand, is designed spe- 
cifically to raise the income level of the farmer (cf . Chapters 13 
and 15). It is made only after an intensive study of the farmer's or- 
ganization and operations. The farmer may apply for a $3,000 loan for 
operating expenses, but after a mutual study of the business by the 
lender and farmer, a program may be agreed upon which calls for a 
total budget loan of $4,000 to expand a livestock enterprise and a ferti- 
lizer program, and to carry out reorganization of the cropping system. 

The new techniques in linear programming, along with increased 
emphasis on farm records, should be tied in with farm lending. Just 
as the budget loan has been recognized as a big advance since 1935, so 
it is possible that the farm management loan will become one of the 
new developments of the sixties. 

In the long-term credit area there is a similar need for farm man- 
agement lending. The farmer who wants to buy an adjoining tract to 
add to his farm should have an analysis made before making the de- 
cision. Similarly, a prospective farm owner who is thinking of pur- 
chasing a 200 -acre unit should have a farm management analysis com- 
pleted before closing the deal. In buying a farm one expects to get an 



202 WILLIAM G. MURRAY 

abstract and have it examined to see if the title is good. Also, it is 
wise to have an appraisal made to see how valuable the property is. 
Why not invest in a farm management analysis to determine the profit 
possibilities of the farm as a productive unit? Diesslin examines this 
question in more detail in Chapter 13. 

It is evident that the new farm management approach has great pos 
sibilities when tied in with credit. The first area in which this combi- 
nation might develop extensively could be in specialized loans like 
those for fertilizer, feed, and equipment. In these specialized loans 
the analysis would be relatively easy, and there would be a selling 
agency interested in providing the service in connection with the sale 
of the fertilizer, feed, or equipment. Eventually all lenders should be 
interested in providing farm management loans since lenders as well 
as farmers would gain from their use. 



EFFICIENCY AND LOW COST 

A final consideration is the possibility of greater efficiency in get- 
ting credit to the farmer with lower cost as the result. This may sound 
like the reverse of the preceding section where additional analysis 
which would probably add to the cost was discussed. The objective here 
is efficiency and low cost for all types of loans. For example, we are 
interested in efficient low -cost farm management loans as well as low- 
cost renewals of well -secured real estate loans and short-term loans 
to hold grain in storage. 

Chief concerns in this instance are volume, sources of funds, and 
risk. The loan agency will probably find that its costs in making loans 
will be closely tied to the size of the loan. This is a factor that is too 
often ignored. Small loans are very costly to make. Many farm credit 
specialists have written high-sounding phrases against high interest 
rates. In some instances the attacks have been justified, but in other 
instances if these specialists had studied the size of the loans, they 
would have discovered that the major reason for the high interest was 
the small size of the loans. The high rates for small loans that are 
legal in most states are in recognition of the high cost involved in mak- 
ing this type of loan. 

The second factor is source of funds. Access to low-cost credit in 
the central money markets has been a major achievement beginning 
with the Federal Land Banks in 1917 and with the Federal Intermediate 
Credit Banks in 1923. This has made farm credit competitive and sen- 
sitive to credit cost changes. For example, it not only brought the low 
rates of the forties out to the farmer, but it also brought the high rates 
of 1959. In the long run this is good, giving the farmer a somewhat 
lower over -all credit cost than if he did not have this indirect access 
to the central money markets. 

Third, and finally, is the risk factor. To bring this difficult feature 
under control, insurance is being used more extensively. Examples 



FARM CREDIT INSTITUTIONS 203 

are the Federal Crop Insurance program, the growing practice of using 
life insurance tied in with all kinds of loans, and insured farm mort- 
gage loans by the Farmers Home Administration. Farm credit in the 
past has often been denied because of the risk involved. However, the 
fact is being more widely accepted that the pooling of risks can be 
handled efficiently and economically by insurance. In the future this 
technique will undoubtedly be expanded greatly to make credit available 
where it is not available now, and it may be used in cases where it is 
now too expensive to make loans. One of the opportunities for insur- 
ance may be that of small loans where some form of insurance may be 
substituted for much costly time and travel. What losses do occur with 
these small loans would be covered by a small insurance fee. In all 
probability the major attack on loan cost will be, as it has been in in- 
dustry and merchandising, in cutting down on labor and using it more 
efficiently. 



Chapter 12 

ERNEST T. BAUGHMAN 

JOHN M. WETMORE 

Federal Reserve Bank of 
Chicago 1 



Prospects for Credit Supplies 
to Agriculture Under 
Continued Economic Growth 



IT IS ASSUMED that the basic trends evident in the agricultural sec- 
tor during the 1950's will continue in the 1960's, viz., declining agri- 
cultural labor force and farm population, declining number of small 
commercial farms, increasing average size of commercial farms, in- 
creasing investment (in real terms) and output per agricultural worker, 
and increasing income of the farm population from nonagricultural 
sources (cf. Chapter 6). Also, the authors assume that the total supply 
of credit in the economy will be tailored to the appropriate over -all re- 
quirements for continued economic growth, and that the availability and 
cost will vary in response to changes in the aggregate demand for 
credit. 

The prospective supply of credit to agriculture under these condi- 
tions will depend upon (1) the intensity of demand for agricultural credit 
as compared with demands from other sectors in the economy (basi- 
cally, the productivity of credit in agricultural uses as compared with 
productivity in other uses) and (2) the efficiency with which the demand 
is transmitted to all the major sources of credit supply— that is, the ef- 
fectiveness of the "credit machinery" available to farmers for obtain- 
ing credit. 



PROSPECTIVE DEMAND FOR AGRICULTURAL CREDIT 

The demand for farm credit is affected by many factors. One im- 
portant factor is the supply of equity capital. Although total farm debt 
has increased rapidly and persistently since the end of World War n, 
the major portion of the capital (including land) used in agriculture is 
represented by equity— not creditor— claims. Total farm debt was 
equal to about 12 percent of the physical farm assets in 1950 and 14 
percent in 1959. While creditor claims probably will increase further 
relative to the value of agricultural assets (if for no other reason, be- 
cause of a slower rise or possibly a decline, in price of farm real es- 
tate), there appears to be no reason to expect large or revolutionary 
changes in the sources of capital used in agriculture. 



1 Views expressed in this chapter are those of the authors and do not necessarily repre- 
sent those of the Federal Reserve System. 

204 



CREDIT SUPPLIES UNDER ECONOMIC GROWTH 205 

While the average size of commercial farms is expected to increase 
further, possibly at a faster pace than during the 1950's, most farms 
will probably continue to be described as "small businesses." Typi- 
cally, small businesses have shown relatively high rates of births and 
deaths of firms, with inadequacies of management and the difficult prob- 
lem of providing continuity of management ranking high as causes of 
failures. Equity, therefore, will probably continue to constitute the 
major portion of capital for small firms, supplemented with limited 
amounts of credit. The rather intensive study of problems of small 
business has indicated that, while credit availability was a problem, it 
was not a major cause of failures or slow rates of growth. 2 

Furthermore, the total capital in agriculture appears to be in ex- 
cess of the optimum amount, as compared with alternative uses of capi- 
tal in the economy. Hence, the prospective need is not that of attracting 
additional capital to the industry in the adjustment process, but rather 
of providing for effective and efficient transfers of ownership of assets 
to fewer but larger units and conversions of capital among various 
kinds of assets. The return to capital used in agriculture is estimated 
to have averaged 6.6 percent during the first half of the 1950's but only 
4.6 percent during the second half (3.5 percent in 1959). 3 At the end of 
1959 the typical interest rate on new long-term mortgages was 6 per- 
cent or more, loans to prime business borrowers were being made at 
5 percent, and government bonds in the intermediate sector were 
priced to yield in excess of 4 percent. Common stocks, however, were 
showing average yields of about 3-1/4 percent, somewhat comparable 
to the return on farm capital. 

A situation in which market prices of agricultural assets are rising 
and rates of return to farm capital are declining is not likely to con- 
tinue indefinitely. In fact, these trends appeared to be undergoing modi- 
fication in 1960. Since supplies of agricultural commodities appear 
likely to continue to be superabundant for the foreseeable future, there 
is not much prospect that aggregate return to capital in agriculture will 
rise. Thus, any increase in the average rate of return would likely be 
associated with a decline in the aggregate amount of capital in agricul- 
ture and in price of one or more of the agricultural assets. This, in 
turn, would probably affect the flow of capital into the industry. 

The current level of farm debt relative to value of farm assets 
would permit a further significant rise in debt, even in the face of sta- 
ble or falling farm income, if the owners of farm assets desire to use 
additional credit. However, at some level the flow of capital into agri- 
culture from both equity and credit sources would probably be retarded 
as debt rose further relative to both value of assets and income. Any 
slowing of the flow of capital into the industry would probably reflect 



2 Financing Small Business, Report to the Committees on Banking and Currency and the 
Select Committees on Small Business of the United States Congress by the Federal Reserve 
System, April 11, 1958, p. 132. 

3 Current Developments in the Farm Real Estate Market, July-November 1959, ARS, 
USDA, Washington, D. C, Feb., 1960, p. 23. 



206 ERNEST T. BAUGHMAN AND JOHN M. WETMORE 

reduced demand for new capital due to low returns on capital and re- 
duced willingness of agricultural credit agencies to supply additional 
credit as repayment prospects deteriorated. Thus, the prospective 
trend of farm income and supply of equity capital is likely to have an 
important effect on both the demand for and supply of agricultural 
credit. 

The institutional arrangements through which equity capital is pro- 
vided to individual farms may change more than the institutional ar- 
rangements through which credit is made available. One of the major 
needs in agriculture is for the consolidation of holdings into larger 
operating units (cf. Chapters 6 and 7). This adjustment has been re- 
tarded because of the strong desire of the owners of farm real estate to 
retain assets in that form, reflecting concern about inflation and the 
use of farm real estate as a good "inflation hedge." This attitude is 
likely to continue into the 1960's and possibly much longer. Such atti- 
tudes are not easily reversed. Hence, if the consolidation of holdings 
is to be accelerated, arrangements which would achieve consolidation 
for operating purposes without the necessity of transferring ownership 
could prove very helpful. Raup developed this point in Chapter 9. The 
institutional arrangements which would appear to merit additional at- 
tention in this respect include the joint ownership of farms, possibly 
through the corporate form of organization, leases, rental contracts, 
and labor -share agreements. An expanded role for these kinds of ar- 
rangements would tend to reduce the need for credit to finance trans- 
fers of ownership. Thus, the expansion of farm real estate debt, based 
upon transfers of land which in 1959 was priced so high as to yield a 
return of only about 3 percent, would be held to a minimum. 4 

It is possible also that institutional arrangements which would fa- 
cilitate the provision of nonreal estate capital to farm businesses from 
equity sources other than that of the farm operator may see a signifi- 
cant growth. Both farm machinery and livestock— two of the important 
forms of capital for many farm operators— would be candidates for such 
arrangements. In some areas leasing or rental arrangements are pro- 
vided on farm machinery, usually for specialized types of machines, not 
unlike those which are relatively common for transportation and con- 
struction equipment. Livestock— both breeding herds and feeder stock — 
can be provided to individual farms by owners other than the farm 
operator. If these kinds of arrangements should come into widespread 
usage as the average size of farm continues to increase and the capital 
invested per farm worker continues to rise, the aggregate demand for 
agricultural credit by farmers might be reduced. 5 However, in order 
to attract this kind of equity capital, the return must be high enough to 
compete with alternative investments. The rate of return to suppliers 
of such capital possibly would be greater than the return on equity 



4 Current Developments in the Farm Real Estate Market, July-November 1959, ARS, 
USDA, Washington, D. C, Feb., 1960, p. 24. 

5 The demand for credit by suppliers of farm machinery, materials, and services, and 
by other participants in the provision of capital to agriculture, probably would increase. 



CREDIT SUPPLIES UNDER ECONOMIC GROWTH 207 

capital of the average farm operator. This would be true if the sup- 
pliers are able to achieve economies in processing or distribution op- 
erations because of the nature of investment, or if they can bring supe- 
rior management skills into the farm operation. 



CREDIT MACHINERY AVAILABLE TO FARMERS 

The credit machinery available to serve agriculture appears to be 
adequate as to both the number and kinds of facilities, and gives evi- 
dence of being fairly good with respect to quality of service (cf . Chap- 
ters 15-18). Commercial banks, through branch and correspondent 
banking, have the potential to tap credit supplies available anywhere in 
the commercial banking system. 6 The kinds of agricultural activities 
which utilize the largest amounts of. credit tend also to be those in 
which the participation of correspondent banks has shown the greatest 
development. Feeder cattle and ranch loans, and loans to help finance 
relatively large-scale production of fruits, vegetables, and field crops, 
as well as the processing and marketing of such crops, frequently are 
provided directly from large banks located far from the producing 
areas or through participation in loans made by local banks (cf . Chap- 
ter 16). 

However, agriculture is by no means dependent entirely upon com- 
mercial banks for access to the national credit market. Nonreal estate 
credit is provided also through the Production Credit Associations. The 
Production Credit Associations have access to the national credit mar- 
ket through the Intermediate Credit Banks and can channel into any ag- 
ricultural community almost any amount of nonreal estate credit that is 
desired by farmers who qualify for such credit and are willing to pay 
interest rates which cover the cost of obtaining the funds. The cost of 
such credit includes the interest rate on the debentures issued by the 
Intermediate Credit Banks, plus the cost of "retailing" such credit to 
farmer borrowers. Thus, the Production Credit Associations and Inter- 
mediate Credit Banks provide a means of assuring that credit is always 
available to qualified borrowers at a "competitive" price. 

As to credit secured by farm real estate, a significant amount is 
provided by commercial banks, but larger amounts are provided by life 
insurance companies and the Federal Land Banks. Murray presents 
data on this subject in Chapter 11. 

A number of life insurance companies invest a portion of their funds 
in farm real estate mortgage loans and, in the aggregate, are an impor- 
tant source of long-term agricultural credit. The investment officers 



6 The results of a survey of loans of commercial banks in 1956 indicated that the number 
and total amount of agricultural loans in which two or more banks participated jointly were 
of importance at that time in only a few areas. This study was reported in Farm Loans at 
Commercial Banks, Board of Governors, Federal Reserve System, 1957. However, there 
appears to have been a large increase in the amount of such loans, especially in livestock 
areas, in 1958 and 1959 (cf. Chapter 13). 



208 ERNEST T. BAUGHMAN AND JOHN M. WETMORE 

of these firms have available a variety of alternative outlets for their 
funds and will be strongly inclined to place the funds where the net re- 
turn is believed to be most attractive, allowing, of course, for diversi- 
fication, utilization of staff, and the like. Here, too, the credit available 
to agriculture must meet the competition from other borrowers, and the 
availability and cost will show some sensitivity to changes in the na- 
tional credit picture. 

These sources of private and cooperative credit are supplemented 
by the Farmers Home Administration which provides a variety of credit 
services to marginal borrowers, utilizing funds appropriated by the 
Congress and funds obtained from private investors on a guaranteed or 
insured basis (cf. Chapters 5, 11, and 14). 

"Nonreporting" creditors, including dealers, merchants, finance 
companies, and others, are also important, accounting for more than 
one -third of nonreal estate farm credit. 7 Some of these creditors, such 
as large manufacturers and distributors of farm equipment and supplies 
and large processors and distributors of agricultural commodities, 
have access to national credit markets. Increasing numbers of these 
firms have organized credit subsidiaries to help boost sales of their 
products (cf. Chapter 13). Others have combined credit, managerial 
advice, and marketing services for the production of individual com- 
modities into an integrated package and have made it available to 
farmers, as discussed in Chapter 8. Thus, credit from nonfinancial in- 
stitutions is important in local areas in the financing of specific capital 
items or farm products, and could easily become more important if the 
traditional sources do not provide adequate credit service. 

The quality of credit service, although improved significantly, can 
be expected to show further adaptation to the specific needs of indi- 
vidual farmers. Engberg discusses this important development in 
Chapter 15. Modifications in the institutional arrangements through 
which credit service is provided to agriculture may well be in response 
to opportunities to improve quality of service rather than any change 
in the over -all supply of farm credit. One trend which has been a 
source of some concern is the tendency for individual farms to draw 
upon credit from several sources. This largely precludes any indi- 
vidual lender from appraising, in cooperation with the farmer, the 
over -all credit requirements of the farm business and the schedule of 
relative productivity of additional capital in the various farm enter- 
prises and the optimum scheduling of credit extension and debt repay- 
ment. However, if individual farmers were to rely upon one "station" 
for all their credit, and if these stations were organized and staffed in 
such a way as to be able to provide comprehensive credit service, 
these problems would be alleviated. Existing institutions, with some 
change in organization and viewpoint, appear to have the capacity to 
provide this kind of credit service. A similar view is expressed by 
Diesslin in Chapter 13. 



7 "The balance sheet of agriculture, 1959," Federal Reserve Bulletin, Board of Gover- 
nors, Federal Reserve System, July, 1959. 



CREDIT SUPPLIES UNDER ECONOMIC GROWTH 209 

POSTWAR CREDIT POSITION OF AGRICULTURE 

In the postwar period the amount of agricultural credit outstanding 
has increased rapidly, reflecting both strong demand for and ample 
supplies of credit. From 1946 to 1950, debt secured by farm real es- 
tate increased by a relatively small amount (15 percent) while nonreal 
estate farm loans held by principal lending institutions (excluding loans 
guaranteed by the Commodity Credit Corporation) increased more than 
two -thirds and loans extended by nonreporting creditors more than 
doubled (Table 12.1). In the decade 1950 to 1959, debt outstanding to 

Table 12.1. Farm Debt Has Increased Relatively More Than the 
Value of Farm Physical Assets While Farm Income Declined 











Percent change 










1946- 


1950- 




1946 


1950 


1959 


1950 


1959 








billion dollars 




Real estate debt 


4.8 


5.6 


11.3 


17 


102 


Nonreal estate debt to: 












Major lending institutions 


1.7 


2.8 


5.8 


65 


107 


Nonreporting institutions 


1.2 


2.4 


3.7 


100 


54 


Commodity Credit Corporation 


0.3 


1.7 


2.5 


467 


47 


Total farm debt 


8.0 


12.5 


23.3 


56 


86 


Proprietors' equity 


94.0 


118.3 


179.8 


26 


52 


Total farm physical assets 


82.2 


107.1 


171.0 


30 


60 


Income of farm population from 












agricultural sources 


17.0 


15.7 


13.6 


-8 


-13 



Source: Economic Report of the President, Jan., 1960, pp. 166, 210, 229, 236; 
Agricultural Outlook Charts, 1960, AMS, USDA, Washington, D. C, p. 55. 

the first two groups of lenders more than doubled while loans by nonre- 
porting creditors have increased about 50 percent. 8 

Commercial banks are by far the largest sources of nonreal estate 
farm loans (cf. Chapter 11). During most of the period since the end of 
World War II, banks in rural areas have held small proportions of loans 
relative to total assets. However, this proportion has increased gradu- 
ally and, in most areas, consistently. During 1960 the term "loaned up" 
was heard increasingly in some agricultural areas, especially in those 
areas in which cattle feeding is an important activity. In most agricul- 
tural areas, however, commercial banks still have had much "elbow 
room" to expand agricultural loans if the quality of the credit appears 
to justify such action. 

The interest rates on agricultural loans made by commercial banks 
have not been as flexible as rates on securities or the rates on large 
loans to prime business borrowers. In part, this results from costs 
other than the "true interest" which are a relatively large part of the 



Agricultural Finance Review, ARS, USDA, Washington, D. C, July, 1959, pp. 144-45. 



210 ERNEST T. BAUGHMAN AND JOHN M. WETMORE 

total cost of making agricultural loans. However, it is a reflection of 
the low loan ratios and a resulting partial insulation of agricultural 
credit from the swings in "credit ease and tightness" which have been 
most evident in the large financial centers. Thus, there has been a 
ready availability of credit to agriculture in most areas during most of 
the period since World War n, and at favorable interest rates compared 
with other sectors of the economy during periods of strong aggregate 
credit demand. 

The apparent credit tightness for some would-be farm borrowers 
has been related more to their low equity position or lack of evidence 
of management skill than to the over -all credit supply. Woodworth and 
Fanning discuss this problem in Chapter 23. Not only has the interest 
rate at banks in rural areas been less flexible than elsewhere in the 
economy, but also banks in all sectors of the economy have had little 
inclination to vary rates on loans according to the risk involved. Since 
the safety of bank depositors' funds rests largely on the quality of a 
bank's loans and investments and the rates are geared to low loss ra- 
tios, there is little or no room in bank portfolios for high-risk loans. 
The experience with bank failures in the 1920's and the 1930's, the poli- 
cies of the supervisory agencies, and the desire of individual bankers 
to protect their personal capital and the deposits of their customers 
restrict most bankers from intentionally making high-risk loans even 
if there were a strong demand for such loans from borrowers in low- 
equity positions. 

Interest rates of PCA's and the FLB's have been possibly more 
flexible than those of rural banks, though limited by competition with 
the banks and other lenders. Yet even in this case agriculture has had 
ready access to credit since securities of the Farm Credit Administra- 
tion have enjoyed favorable reception in the capital markets with only 
small premiums over rates for government securities. In addition, 
there has been strong competition among lenders for farm real estate 
loans, with the result that upward adjustments in rates have been lim- 
ited and deferred during periods of rising rates in the national market. 

All these credit agencies restrict their lending, by and large, on the 
basis of the amount of equity capital of the borrower, modified some- 
what by other factors, including prospective earning capacity and char- 
acter. But agriculture has again been in a favored position because the 
Farmers Home Administration makes a limited amount of loans at 
favorable terms to selected borrowers who lack equity capital and can- 
not obtain credit elsewhere. It is questionable whether this type of ad- 
ditional credit supply to agriculture should be expanded, in the present 
context of agricultural surpluses. 

A review of the experience in the postwar years indicates that agri- 
culture has been in a sheltered and relatively favorable position with 
respect to both availability and cost of credit, especially during periods 
of monetary restraint. The major factors have been the abundance of 
credit resources at country banks and the favorable institutional pro- 
visions for financing agriculture. 



CREDIT SUPPLIES UNDER ECONOMIC GROWTH 211 

PROSPECTIVE CREDIT SUPPLIES TO AGRICULTURE 

The thesis advanced in this chapter is that the prospective credit 
supplies to agriculture are likely to be adequate for the expected de- 
mand. This conclusion is reached even though the preferential position 
of agriculture's access to credit has diminished and, under conditions 
of continued economic growth, probably will diminish further in the 
1960's. The basic reason behind this preferential position has been in- 
sulation of commercial banks in rural areas from changes in credit 
conditions in the large financial centers. However, as loans at rural 
banks reach a large proportion of total assets, the need for tapping 
credit supplies elsewhere leads to a much greater sensitivity to credit 
conditions in the rest of the economy. If trends continue in agriculture 
and commercial banks continue to provide effective credit service, es- 
pecially for the larger farms, branch banking and correspondent banking 
arrangements probably will see further development, as suggested by 
Hopkin in Chapter 16. This may be necessary to enable small banks in 
rural areas to serve relatively large customers and to assure that 
pools of credit stringency and credit abundance do not exist simultane- 
ously in different areas. If the need for additional supplies of credit 
causes commercial banks in rural areas to become more flexible in 
their interest rate policy, the restraints on interest policy of other ag- 
ricultural lenders in competition with banks would be lessened. 

The volume of agricultural loans at rural banks is limited by (1) the 
amount of deposits these banks can attract and retain, (2) the ability to 
increase loans as a proportion of the total assets of the banks, and 
(3) the alternative demands for credit at these banks. In the postwar 
period (1948-59), deposits of rural banks have not risen proportionately 
as much as have farm loans, though in absolute terms the increase in 
deposits has been much greater. 9 

Perhaps of greater importance is the faster rate of growth of bank 
loans other than agricultural loans in this period. In all but four states, 
agricultural loans declined as a proportion of total loans. This may be 
due in part to the relative decline in importance of the farm population 
and agriculture within the economy, a higher rate of return on alterna- 
tive types of loans (e.g., consumer installment loans) and the diffusion 
of nonagricultural activity into areas served by "agricultural banks" as 



9 The available data do not provide a classification of banks which can properly be called 
rural or agricultural banks for purposes of analysis of deposits and ratios of loans to assets. 
Possible groupings include state banks insured by the Federal Deposit Insurance Corpora- 
tion which are not members of the Federal Reserve System, all state banks, or all operating 
banks. None of these groupings of banks have uniformly high ratios of agricultural loans to 
total loans in all states. No grouping in the New England, mid-Atlantic, Florida, or the 
West Coast regions had a high proportion of agricultural loans to total loans, so those states 
were not included in the analysis. In each of the remaining regions, those groupings which 
had sizable proportions of agricultural loans to total loans were included in the analysis. 
All groupings had proportions of 15 percent or more in each region, though proportions in 
individual states fell short. These also included a relatively large proportion of all bank 
loans to farmers in each region, 40 percent or more, though proportions in individual states 
fell short of this level. 



212 



ERNEST T. BAUGHMAN AND JOHN M. WETMORE 



June 30 or nearest call report date for banks; June 30 for Production Credit 
Associations. 




Total agricultural 
loans at all 
operating banks 



Non-real estate 

agricultural loans 

at all operating banks 



Production Credit 
Association loans 



Bank deposits of 
individuals , partnerships 
and corporations at 
selected groups of 
"agricultural" banks 



Ratio of total loan* to 
total assets at selected 
groups of "agricultural" 
banks 



Percent 
(ratio scale) 
40 



30 



20 



1948 



50 



•52 



54 



'56 



'58 



Fig. 12.1. Agricultural loans outstanding, bank deposits, and 
bank loan ratios in 31 agricultural states. 



defined in the study cited in footnote 9. It appears that the diffusion of 
activity is merely a corollary to the relative decline of the agricultural 
sector of the economy. 

Throughout the postwar period, the faster rate of increase in loans 
than in deposits at the agricultural banks included in this analysis has 
resulted in an increase in the ratio of loans to assets (Figure 12.1). In 
1948 the ratio was below 23 percent, and by 1959 it was more than 42 
percent. While this is not a high ratio compared with periods such as 
the 1920's, if this trend were to continue, it would have important im- 
plications for the prospective supply of agricultural credit. 



CREDIT SUPPLIES UNDER ECONOMIC GROWTH 213 

Deposits at agricultural banks have increased steadily in most re- 
gions since 1949. Only in the Great Northern Plains was there a small 
decline in the mid-1 950' s, though in Texas, Oklahoma, and the Mountain 
states the rate of increase slowed noticeably. It is important to note 
that these regions were affected by drought at that time and also ex- 
perienced a sharp reduction in cattle prices. Yet, total deposits were 
affected only modestly. If continued economic growth is assumed, it 
would be reasonable to expect continued growth of deposits in these 
banks though perhaps at a slower rate than in the country as a whole. 10 

While total agricultural loans of both banks and the PCA's have 
shown a strong general uptrend in the postwar years, the period from 
1953 to 1957 was marked by a downturn and slow recovery. The same 
pattern was in evidence in all areas of the country with the exception of 
the Lake states, where there was almost no change from 1952 to 1954. 
The late 1950's have been marked by a rapid increase in agricultural 
loans in all areas, with the largest increases in the Corn Belt and 
Great Plains regions. These fluctuations in loan volume have been 
closely related to changes in net farm income and, especially in the 
Corn Belt and western range areas, to changes in cattle prices. 11 

With the prospect of farm income continuing at low levels under the 
heavy pressure of surpluses, any prospective increase in demand for 
farm credit would seem to be limited. 12 The rise in agricultural loan 
demand during the late 1950's has been in response to the unusual in- 
crease of farm income in 1958 (which in turn brought optimistic expec- 
tations and enlarged purchases of farm capital items) and the increase 
in cattle prices and numbers during the upswing in the current cattle 
cycle. These phenomena are not likely to be repeated soon, and there- 
fore the strong demand for farm loans cannot be expected to continue. 
In view of the dim outlook for farm income, it is unlikely that farm 
loans can maintain a rate of increase even as high as the trend in the 
postwar period. 

It is recognized, of course, that the impact of modern agricultural 
technology means capital requirements of individual farms will con- 
tinue to increase. This, together with increasing mechanization and 
larger amounts of nonfarm inputs, will expand credit needs of individual 



10 A study of the relation of deposits of rural banks to cash receipts from farm marketings 
in the Seventh Federal Reserve District, 1924-40, indicated a relatively high sensitivity of 
deposits to changes in farm income: Business Conditions, Federal Reserve Bank of Chicago, 
Aug., 1948. This relationship is still evident for selected agricultural banks, but for the 
same groups of banks used in 1924-40 it had largely disappeared for the period 1946-58 — a 
further indication, no doubt, of the diffusion of nonagricultural activity into rural areas. 

11 Both farm income and cattle prices reached peaks in the early 1950's. A major break 
in cattle prices came in the winter of 1952-53 and brought a decline in farm loans in the 
areas where cattle financing is important. The rise in cattle prices and the expansion in 
cattle numbers in 1957-59 were accompanied by a rapid rise in loans in these same areas. 

12 It is assumed that the demand for farm products will not be increased by war or natural 
catastrophe, and also that public expenditures for support of farm prices and incomes will 
not increase materially. The adoption of strict and comprehensive production controls is 
not anticipated. Under these conditions, farm incomes can hardly be expected to rise sig- 
nificantly in view of the vast production potential of our agricultural plant and the inelastic 
nature of demand for farm commodities. 



214 ERNEST T. BAUGHMAN AND JOHN M. WETMORE 

farmers (cf. Chapter 6). Furthermore, a rise in aggregate demand for 
agricultural credit can be expected whenever a rise in farm income 
improves expectations and brings increased purchases of capital items. 
But this would only modify the tendency for a slower trend in the growth 
of total agricultural loans. 

Even though the deposits of agricultural banks will not be affected 
by farm income as much as will demand for agricultural loans, non- 
agricultural loans may be expected to continue expanding. Thus, the 
loan ratios of rural banks, even with the prospect of a slower growth of 
agricultural loans, are likely to continue upward under the assumption 
of continued economic growth. As agricultural banks reach the point 
where they need to tap outside sources of credit, the closer contact 
with financial centers will tend to make their lending policies more 
sensitive to developments in the money market. 

In many agricultural areas, the cooperative agencies and other pri- 
vate lenders will continue to provide strong competition with the com- 
mercial banks. In addition, these banks will have an increasing number 
of investment alternatives available and, for most of them, the yield 
will be sensitive to the national credit market. Thus, it would appear 
that the availability and cost of agricultural credit in general will be- 
come increasingly sensitive to changes in monetary and fiscal policy 
and to shifts in supply and cost conditions in the national credit market. 
This should be the result if the credit machinery to which farmers have 
access is adequate and functions effectively, and that appears to be the 
situation. Under these circumstances, the availability and terms of ag- 
ricultural credit should be quite comparable to the availability and 
terms in other sectors of the economy, allowing, of course, for inves- 
tors' judgments as to relative risk and the retailing cost. 

The important factors in the prospective regional demand for credit 
seem to be the income elasticity for different agricultural products, the 
shifts in population, and the shifts in agricultural production to those 
areas with the greatest comparative advantage under the impact of 
technological change. Livestock products and fruits and vegetables are 
expected to have the greatest consumer preference under the assump- 
tion of high and rising consumer income. These factors, together with 
the prospect of further westward migration of population, would indicate 
in the future a stronger demand for agricultural credit in the Corn Belt 
and the West than in other regions. 



Chapter 13 



HOWARD G. DIESSLIN 

Farm Foundation 



Evaluation of the Credit 
Market and Credit 
Institutions 



WHAT IS HAPPENING on the financial front in agriculture ? A 
close look at Table 13.1 quickly indicates windfall gains from 
inflation much like we've seen in the stock market and other 
ownership sectors of the economy. The same land base of 1940, with 
material improvements and more real estate added, of course, was 
worth nearly four times as much in 1960. Other farm assets have in- 
creased in value on a similar scale. Debts of farm operators have 
more than doubled— increased at about one -half the rate of increase in 
farm assets. 

Table 13.1. Comparative Balance Sheet of Agriculture, 
January 1, 1940, and January 1, 1960 



Items 


1940 


1960 




(billion dollars) 


Assets 






Real estate 


33.6 


129.1 


Nonreal estate 


15.2 


56.1 


Financial assets 


4.2 


18.4 


Total 


53.0 


203.6 


Claims 






Real estate debt 


6.6 


12.3 


Nonreal estate debt 


3.0 


10.6 


Commodity Credit Corporation 


.4 


1.4 


Total 


10.0 


24.3 



Source: The Balance Sheet of Agriculture, 1960, USDA Agr. 
Info. Bui. 232, Washington, D. C, Aug., 1960, p. 2. 

Thus, the financial condition of the agricultural plant, in the aggre- 
gate, is extremely solvent. In no period since 1920 has the industry's 
financial health been so sound as during the 1950's. Assets nearly 
quadrupled and net farm income tripled while total debts only doubled 
from 1940 to 1960. Delinquency on indebtedness and foreclosures have 
been practically nonexistent. Rapidly rising land values have elimi- 
nated the need for foreclosures and offset any lending errors that may 

215 



216 HOWARD G. DIESSLIN 

have occurred. Windfall gains in asset values have removed some of 
the " sting" of depressed farm earnings. However, such gains are real- 
ized only on sale of the property or through the enlarged credit base 
provided. 

Few of the credit problems anticipated at the close of World War n 
have materialized. Yet, always on the horizon is the possibility the 
situation may change. Certainly the strong financial condition of the 
industry has helped agriculture weather the cost -price squeeze. 



CHANGING CREDIT CLIMATE 

Agriculture is faced with higher interest rates, rising taxes, and 
lower farm earnings. The result at some point must be lower farm 
real estate values. It is all but certain that this point has been reached. 
Farm real estate values have continued to rise despite falling net farm 
income as follows: 

1939-59 1951-59 
(percent) 
Changes in net farm income +150 -28 

Change in farm real estate values +244 +41 

The USDA reports a 3 percent rise in land values from March, 
1959, to March, 1960, compared with an almost 8 percent rise during 
the same period a year earlier. For some years to come, we may look 
back to the March, 1960, index as the all-time high for farm land values 
in the United States. 

Reports from different sections of the nation indicate that land 
values are leveling off in many areas. The demand among farmers to 
enlarge farm units will continue strong. However, farm land is selling 
more slowly. There has been a noticeable shift from a "sellers" mar- 
ket to a "buyers" market. However, land values will not decline sharply 
unless the number of farms for sale increases substantially. The 1960 
levels of farm income, taxes, and interest costs will not support land 
values except for enlargement purposes. 

If the above prediction does materialize, important credit implica- 
tions are involved. Repayment of loans must then come from net earn- 
ing capacity. Adequate repayment capacity can hardly be provided by 
rising asset values and a corresponding increase in credit base, the 
situation which has prevailed for more than 20 years. 

RETURN TO SOUND CREDIT PRINCIPLES 

In the 1940's and 1960's credit was the farmer's cheapest produc- 
tion tool in many respects. This period was an "empire builder" for 



EVALUATION OF CREDIT MARKET AND INSTITUTIONS 217 

those with sufficient initiative to use large amounts relative to total as- 
sets in their business. Now a period when asset values on farm prop- 
erty may remain relatively stable at best, or may deflate somewhat, is 
anticipated. In addition, the United States economy generally has used 
the loan reserves accumulated in the 1940's and early 1950's. The 
postwar credit expansion has about run its course, and agriculture must 
compete with other sectors of the economy for the existing credit base 
plus the growth in this base from year to year. 

In broad terms a farm operator is thought of as having a zero equity 
in his operation as a hired man. He has no risk except the loss of his 
job. On the other hand, a farmer having a 100 percent equity in his 
business (and little or no credit base) is a subsistence farmer. The 
higher and more stable the earning capacity of the farm business, 

(1) the higher the credit base relative to the total asset structure, and 

(2) the greater the possible division of ownership, management, and 
operation in the business. In addition, the permanent and indestructible 
qualities of land have always been given special credit consideration. 

The 1960 period is one of indecision on agricultural credit. Some 
lenders may soon become loss -conscious and overcurtail amounts of 
loans. Farm suppliers generally remain sales -conscious and find the 
needed credit to finance their sales. As soon as losses to suppliers 
begin to increase materially, they will likewise be more concerned 
about sound credit principles. There is no credit panacea for the farm 
income problem. There is no magic new credit device to (a) solve in- 
come problems of individual farmers, or (b) solve the income problem 
of agriculture. Careful financial planning can (1) raise income on 
farms needing capital that currently have good balance between owned 
and borrowed capital, and (2) quickly cut back credit lines on farms 
that are overextended relative to earnings and assets. 

Commercial lenders generally have been faced with declining lend- 
able reserves. Interest rates are at near record levels, considering 
the years since 1935. Loan committees face the distressing job of con- 
tinually reappraising their loan portfolios. What industries and which 
individual farms should be given priority? Who falls out of the credit 
portfolio? Lenders have again assumed the difficult and responsible 
task of allocating future business expansion within their sphere of oper- 
ation. Agriculture and the individual farmer have a large stake in this 
process. Fortunately, the industry enters this era with its financial 
organization in good order. 



EFFECTS OF TECHNOLOGY ON EARNING CAPACITY 

The widespread application of new technologies and improved man- 
agement to the commercial farm have tended to expand the size and 
scale of efficient operation very rapidly during the few decades before 
1960 (cf. Chapters 6 and 7). The net result has been larger capital re- 
quirements per man and per farm along with greater division of labor, 



218 HOWARD G. DIESSLIN 

management, and ownership functions in the commercial farming oper- 
ation. Commercial agriculture is beginning to show a greater tendency 
to produce for a market rather than just to produce goods. Integration 
of the agri-business structure in commercial agriculture is leading to 
increasingly complex financial problems. As this whole process moves 
forward, the objective in commercial farming may soon become control 
rather than ownership of resources in agriculture. Certainly, financial 
management increasingly is the key to success or failure of the indi- 
vidual firm in commercial agriculture. 

The net effect of the rapidly changing size and scale of the commer- 
cial farming operation has been to increase the difference in earning 
capacity of individual farms and operators in the commercial farming 
classification. 1 As a more concrete example of this widening range in 
earning capacity, consider this simple illustration: 

Net Income for a Given "Bundle" of Labor, Capital, 
and Management on Commercial Farms 

Upper one-third Middle one-third Lower one-third 

1940 $3.00 $2.00 $1.00 

1959 4.00 2.00 .50 

The author here is speculating that the real net income to the 
"bundle" of resources has increased materially for the upper one -third 
of the commercial farms since 1940; that it has changed little or none 
for the middle one -third; and that net earnings in real terms to those in 
the lower one -third has probably decreased. The difference in earning 
capacity has widened materially between the upper and lower third of 
commercial farms, in fact, even between the upper and middle third, 
during a very short span of years. Along with this, we also recognize 
that the typical bundle of labor, capital, and management resources has 
shifted toward more management and capital and much less labor. The 
author estimates that the ratio changed from 3-2-1 to 8-4-1 during this 
period. It is not argued that the magnitude of the change in ratio is any- 
where near correct, but that the direction of the change is correct. If 
this assumption is valid, important financial implications follow from 
the rapidly changing nature of the economic unit called the commercial 
farm. 

The differential between the commercial and noncommercial farm- 
ing sectors is even more striking. Thinking in terms of the part-time, 
residential, and low-income subsistence units in the noncommercial 
farm sector, a monetary comparison would be rather difficult to make. 
On the one hand, the bulk of the income of the commercial farm is from 
farming. On the other hand, a larger percentage of the income of the 
noncommercial sector comes from nonfarm sources. However, the 



1 H. G. Diesslin, "Effect of urban and industrial development on agricultural finance, 
Jour. Farm Econ., Vol. 40, No. 5, Dec, 1958. 



EVALUATION OF CREDIT MARKET AND INSTITUTIONS 219 

differential between the commercial and noncommercial sectors was 
still not so distinct in the 1930's and early 1940's. The author doubts 
seriously whether this was true in 1960. Basically, the noncommercial 
sector of agriculture has been an owner -operator type of unit with a 
limited amount of credit available to it. What credit was available 
came primarily from individuals and local lending institutions, and the 
amount was based more on the balance sheet and moral characteristics 
of the borrower than on the earning capacity of the farm resources. 
Here, too, is another example to illustrate the widening differential of 
farm earnings between the commercial and noncommercial sector: 

Net Returns to a Given "Bundle" of Labor, Capital, 
and Management in Agriculture 

Commercial farms Noncommercial farms 

1940 $2.00 $1.00 

1959 2.50 .25 

In terms of real net returns to a given "bundle" of resources, the 
author speculates that the ratio between noncommercial and commer- 
cial agriculture went from 1-2 in the pre -World War II period to 1-9 in 
1960. In addition, it is taken into account the fact that the volume of 
gross production per farm in the noncommercial sector traditionally 
has been extremely small as compared with the commercial segment. 

If the part-time farmer is going to be credit worthy from the farm 
or the nonfarm standpoint, one must look at the pattern of urban and in- 
dustrial development to determine where opportunities exist. Areas of 
rapid urban and industrial development no doubt offer some credit po- 
tential. However, the financing problem of the part-time farmer, in- 
cluding the credit problem, is becoming more and more a problem to be 
answered in terms of the amount and variability of nonfarm income and 
the resale value of the property in question. 

Little time needs to be spent with the question of the residential 
farmer. Here the financing problem and the credit base at the outset 
rests on the individual's financial situation and earning capacity in non- 
farm employment. 

In reviewing the financial implications of the above situation, some 
of the conclusions drawn are as follows: 

1. The earning capacity of the farm in question becomes the sig- 
nificant factor in determining the debt -carrying capacity of any given 
farm. 

2. The debt -carrying capacity (from the standpoint of total asset 
structure) of the upper one -third of our commercial farms has in- 
creased materially since 1940, while the reverse situation holds for 
the lower one -third of our commercial farms. 

3. With each passing year, the finance problem in the noncommer- 
cial farm sector becomes more and more a problem of financing a non- 
farm rather than a farm enterprise. 



220 HOWARD G. DIESSLIN 

APPRAISAL OF CURRENT AGRICULTURAL CREDIT PRACTICES 

Credit practices in American agriculture have changed materially 
since the early part of the twentieth century. 2 The credit base of the 
industry has strengthened substantially as farming has moved to a com- 
mercial business structure. In addition, the capital and credit require- 
ments per farm and per working man have pyramided during this short 
span of half a century. 

One of the more prominent features of the earlier period yet re- 
mains, i.e., specialized lending institutions which finance only a part of 
the farming operation provide the major share of the credit to agricul- 
ture. Thus, in appraising credit practices, account must be taken of the 
conventional kinds of credit used— short-, intermediate-, and long-term 
loans— since any analysis made is more easily understood on this basis. 

Short-term credit includes that used for operating expenses. In 
terms of the type of property being financed, short-term credit is gen- 
erally associated with nonreal estate items. 

Intermediate -term credit includes that used for purchase of assets 
that have a productive life in excess of one year, such as machinery, 
breeding stock, land improvement, building improvements, and the like. 

Long-term credit is generally associated with farm real estate. 
Intermediate -term credit, therefore, overlaps into both the short- and 
long-term areas. 



Short-Term Operating Credit 

What progress has been made with the two perennial problems as- 
sociated with operating loans— terms that are too short and collateral 
requirements that are too high? Lenders have expanded the use of 
budgeted loans which match repayments with estimated income dates 
and which base note terms more nearly on income capacity. 

Collateral security has by no means been relegated to a minor role. 
In fact, chattel mortgages are more commonly used even for farm op- 
erating needs. The stigma attached to a chattel mortgate was largely 
removed during the 1950's. Lenders are using the chattel mortgage 
much more frequently. This instrument helps to insure that one lender 
will handle all the borrower's operating credit needs. Where this is the 
purpose, lenders are doing both the borrower and themselves a service 
as long as they meet the farmer's needs for optimum farm operations. 

Alert lenders are fitting their short-term loans to the productive 
needs of the farmer. They gear the loan to proper fertilizer use, bal- 
anced feed rations, better seed, and the like. Such loans are repaid 
from gross income of the farm, whereas real estate loans must be re- 
paid from net farm earnings. 



2 H. G. Diesslin, "A re-examination of the credit needs of agriculture," Jour. Farm 
Econ., Vol. 36, No. 5, Dec, 1954. 



EVALUATION OF CREDIT MARKET AND INSTITUTIONS 221 

A large volume continues to be handled by farm suppliers. Farmers 
can reduce costs materially on many items with cash purchases. Short- 
term credit from credit agencies remains an important tool to aid the 
farmer in reducing costs and increasing income. This is the type of 
credit many lenders are best adapted to service. A larger volume is 
available to lenders in most agricultural areas. 

Despite the continued increase in cash operating costs relative to 
total farm income during the past several decades, there are probably 
fewer inherent problems in this credit area than either the intermediate- 
or long-term areas. Although inadequate note terms and high collateral 
ratios are still common problems in some areas, much progress has 
been made. Continued effort to overcome inadequate note terms and 
high collateral ratios will serve to strengthen the loan portfolios of 
lenders and to give farmers a firmer economic base on which to plan 
their farm operations. (Also, see related discussions in Chapters 
15-18.) 



Intermediate -Term Credit 

Credit in this area can be more effective in increasing the produc- 
tivity of agriculture than in any other area. Yet this continues to be the 
weakest link in the agricultural market. Engberg arrives at a similar 
conclusion in Chapter 15. Problems requiring study include the amount 
and continuity of the investment program needed to yield results as well 
as the nature and terms of the credit program needed. Since the suc- 
cess of intermediate credit programs depends more heavily upon in- 
creases in productivity than do other types of credit programs, lenders 
generally have been slow to adapt their loan programs to meet the situ- 
ation. 

Capital assets for which intermediate -type credit is required may 
be divided into two major categories. 3 First, certain items are needed 
even to farm on a commercial scale. These would include the farmer's 
machinery, his breeding stock, and other similar items. These capital 
assets have become a substantial portion of the total assets on commer- 
cial farms. 

The second major category of capital assets includes those needed 
for improvement, adjustment, or expansion programs. These improve- 
ments may be of either a real or nonreal estate nature and have a pro- 
ductive life in excess of one year. The purpose of these improvement, 
adjustment, or expansion programs is to increase the earning capacity 
of the farm and the income of the farm operators. 

Such programs generally follow a sequence which must be completed 
in order to yield expected increases in net returns. For example, in 



3 J. H. Atkinson, Financing Adjustments in the Southern Piedmont, Farm Credit Admin- 
istration Bui. CR-7, July, 1955; L. E. Kreider, Farmers' Needs for Intermediate-Term 
Credit, Farm Credit Administration Bui. CR-6, Oct., 1954. 



222 HOWARD G. DIESSLIN 

shifting from a cash crop to a cash crop-dairy program, a farmer must 
establish a pasture and make ready the dairy barns and other equipment 
before the cows can be purchased and the milk'sold. In other cases, the 
improvement program may merely be a matter of doubling or tripling 
the present size of an enterprise in order to increase efficiency of pro- 
duction. 

The total capital involved in such an improvement program may be 
substantial. Studies of such improvement programs on individual farms 
over a period of years indicate that they may, in many cases, equal the 
original investment in real and nonreal estate assets. 

With respect to this latter type of intermediate credit need, the 
lender must be skillful and experienced in order to assess the probable 
results properly. 

First, he must be able to estimate the increase in the earning ca- 
pacity of the farm operating unit after the capital investment program 
is completed. Second, he must be able to judge the time span necessary 
in order to complete the improvement program and determine when the 
increased earnings will be forthcoming. Third, the lender should be 
able to judge the change in fair market or sale value of the property in 
the community which will result from the completed improvement. 
This is particularly important in the case of real estate improvement— 
new buildings, tile, fence, soil improvement, and the like. The lender 
should be able to reappraise the farm in view of these improvements 
and increase the loan limit on the property accordingly. Proper pre- 
cautions can be taken to see that the money loaned is used for the im- 
provements designated. 

The essential factor in the success of this type of lending program 
is correlating payment programs with repayment capacity. Murray and 
Engberg present similar arguments in Chapters 11 and 15, i.e., most 
programs must be carefully budgeted in order to estimate the income 
dates and amounts. Income must be balanced against a continuation of 
investment expenditures that follow a logical sequence. Much support 
has been given to the idea that a five-year investment program should 
be covered by a five-year note, a seven-year program by a seven-year 
note, and the like. On the contrary, the term of the note need not coin- 
cide with the length of the program. Where the repayment capacity on 
a sound loan is five years, a five-year repayment program is essential, 
but the term of the note in this situation may vary from one to five 
years, depending on several circumstances. The actual term of the note 
written on intermediate -term credit should depend on the risk of the 
loan in question. The term of the note can be used by the lender to re- 
duce the risk of the loan, or at least to retain better control of the situ- 
ation. 

First, assume that we have a marginal borrower. He currently has 
borrowed about all that is safe on his real estate and nonreal estate as- 
sets in his particular situation. However, careful budgeting indicates 
that an investment equal to 15 percent of his present total assets over 
the next four years would increase the net earning capacity of his farm 



EVALUATION OF CREDIT MARKET AND INSTITUTIONS 223 

about 50 percent. Such a loan would be a sound investment for the 
lender, since it increases the repayment capacity on the money already 
loaned as well as on the intermediate credit necessary to improve the 
farm. However, this is a situation of maximum risk to the lender. In 
order to retain control of the situation, the lender should logically use 
an annual note in order to keep repayment "pressure" on the borrower. 
If trouble develops, the lender is in a position to act quickly in this sit- 
uation. 

A second situation might involve an individual with a safe debt load 
who is currently adjusting his farming operation to include a major 
livestock enterprise. In this situation, the managerial ability of the 
operator with respect to this new enterprise is unknown. Such an in- 
vestment would require a repayment program of several years. If the 
lender is concerned about the risk, an annual note is in order. How- 
ever, the borrower in this situation is entitled to a written agreement 
stating the conditions of the renewal from year to year. 

The third category would include the individual who has sufficient 
equity, proven managerial ability, and well -formulated operation plans. 
There is every reason to give him a note of the same duration as the 
repayment program set up for the loan— whether it is a three -year or a 
five-year repayment program. 

The term of note is restricted by state statutes and supervisory di- 
rectives in some instances. For example, some commercial banks are 
restricted to loans not exceeding one year unless secured by a title re- 
tention note (conditional sales contract or purchase money contract). 
There are no federal laws or regulations limiting the note term, and 
there is no opposition from the Federal Reserve Board. A letter by the 
Board of Governors (S-1579) was valuable in that it helped to clear up 
this important credit policy area for banks. 

Often farmers, particularly those who already have some credit 
base, find it extremely difficult to retain much flexibility in their pro- 
gram if a commitment is made on a note with terms longer than one 
year. Farm operators seldom make detailed plans over a five- to 
seven-year period, even though a major improvement program may re- 
quire such a time span. And timing of the improvement program by the 
farm operator will vary materially with year-to-year changes in 
prices, yields, and other expectations. 

An annual appraisal of the year's results, which allows checking the 
progress and adjusting future plans, is a strong advantage of the annual 
renewable loan to both lender and borrower. Most farmers have in 
mind a long-term operating objective, and they plan year by year toward 
that objective. This objective is subject to constant revision as a result 
of economic and production uncertainty. Where a substantial amount of 
the investment loan is renewed from year to year, however, a written 
agreement stating the condition of the renewal is highly desirable. This 
practice is not currently followed. 

Commercial lenders must adapt their lending policies to the in- 
creased intermediate credit needs if they expect to serve agriculture. 



224 HOWARD G. DIESSLIN 

Based on economic considerations, added working capital such as more 
machinery, livestock, buildings, tile, fences, and the like, create new 
wealth in agriculture just as new homes do in the general economy. 



Long-Term Loans 

Under present mortgage lending practices, considerably less than 
50 percent of the current market price of a farm can be borrowed on 
the average. Loans as high as 50 percent of the market price on the 
average, and better quality real estate, are becoming less uncommon. 
However, less than 50 percent is the practical maximum on most of the 
commercial land in farms in the United States. 

Mortgage loans are such a small percentage of the current market 
price that any loss to the lender is hardly conceivable. Delinquency and 
foreclosure have been practically nonexistent since the beginning of 
World War II. Even during the 1950's, delinquency did not increase a 
great deal. It is true that this conservative lending policy retarded the 
rise in farm land value during and following World War n. At the same 
time it has made the purchase of farm real estate more difficult for 
potential farm owners. 

Compared with its earning capacity, the market price of average 
and below-average farm land is generally well above that of good land. 
Therefore, large loans relative to selling price on these properties tend 
to magnify the problem on land that is already overpriced. The peren- 
nial problem in farm mortgage lending continues to be the lack of suffi- 
cient differentiation between good and poor land, even though this con- 
dition has been substantially improved. If any risk exists at all on farm 
mortgage loans outstanding, is it not on the below -average farms on 
which relatively large farm mortgage loans may have been placed? 

The mortgage lending situation is now almost the reverse of the 
situation during World War I. First and second mortgages for a high 
percentage of the sale price, written on short-term, unamortized notes, 
were common around this war period. As of 1960, there were conserv- 
ative lending ratios and partially or completely amortized loans for 
terms of 15 to 35 years. The lending policy is fairly adequate and pos- 
sibly economically sound during periods of rapidly rising land values 
and high farm incomes such as were experienced during the 1940's. 

However, during periods of lower farm income and relatively stable 
land values, such as may be experienced in the 1960's, conservative 
lending ratios could be a formidable barrier to the transfer of farms 
from one individual to another. Such situations bring strong pressure 
for lower equity farm mortgage loans at a time when repayment ca- 
pacity is much reduced. 

After re-examining the many farm mortgage experience studies 
available and comparing lending practices in agriculture with lending 
practices in other industries, one must point up the real danger of ris- 
ing land values from a low-equity loan program and to almost assured 



EVALUATION OF CREDIT MARKET AND INSTITUTIONS 225 

foreclosures and ensuing losses in periods of agriculture recession. In 
addition, farms in better land classes are capable of carrying higher 
debts relative to fair market price than those in poorer land classes. 
Only higher debt to value ratios on good relative to poor land can tend 
to equalize foreclosure and loss rates on different types of land and as- 
sist the potential buyer in recognizing and better pricing land of differ- 
ent classes. 

If commercial farm mortgage lenders are interested in forestalling 
further competition in the farm mortgage market, is it not logical to 
assume that they will have to reappraise their loan to value ratios and, 
in so doing, become increasingly careful of amounts loaned on property 
of different grades within geographic areas? This author agrees with 
Tootell's statement in Chapter 17 that further experimentation with the 
open -end mortgage is needed, and a careful examination of the merits 
of partial versus full amortization is desirable. 



FINANCING MODERN COMMERCIAL AGRICULTURE 

Historically, agriculture has been notorious for its fragmentary fi- 
nancing pattern. Until relatively recently, much of the financing has 
been done on a commodity basis. Even in 1960 it was not uncommon for 
lending institutions to approach the farmer's credit needs from the 
standpoint of financing feeder cattle, dairy, cotton, farm machinery, 
broilers, or tung nuts. The nature of agricultural operations is such 
that the commodity financing approach is not adequate. Likewise, 
piecemeal financing, enterprise by enterprise, is not a sound credit 
arrangement. 

The merchant is still an important source of credit, but commercial 
lenders have materially reduced the proportion merchants have to 
carry. For example, the farm machinery industry has made a notable 
shift from manufacturer and dealer financing to commercial lender fi- 
nancing since 1940. Although manufacturers carried farmers' notes 
equal to nearly one -half of their equipment sales throughout the 1930' s, 
practically all of this was shifted to commercial lenders in the 1940's. 
In 1960 manufacturers financed more of their sales once again as a 
matter of sales policy. 

The bulk of the country's commercial broiler industry is being fi- 
nanced by the feed manufacturers and dealers (cf. Chapter 8). This in- 
dustry is in about the same position the farm machinery industry was in 
the 1930's. 4 Since the broiler industry is a relatively new, highly spe- 
cialized operation, the conventional lending institutions have hesitated 
to play a more direct part in its development. However, with few ex- 
ceptions, commercial lenders have had experience with this type of 
production and would be able to supply much of the specialized credit 



4 H. G. Diesslin, Agricultural Equipment Financing, Nat. Bur. Econ. Res., Occasional 
Paper No. 50, 1955. 



226 HOWARD G. DIESSLIN 

needed. Sales policy of suppliers would need to change substantially be- 
fore the industry could become attractive to the banker at producer 
level, however. 

The historical commodity financing approach has given rise to spe- 
cialized lending institutions which can finance part, but not all, of the 
farmer's operation. These institutions were developed in a time of 
critical need and were justified. However, with increasing size and 
commercialization of agriculture, we have reached the point where a 
lending institution must be in a position to finance or to arrange financ- 
ing of the entire farming operation rather than just a portion of it. 

Specialized lending institutions which can finance only part of the 
farming operation are at a competitive disadvantage in the agricultural 
lending picture. There are many disadvantages to financing a farm op- 
eration through several institutions, and this situation generally results 
in more limited availability of credit than the farm operation warrants. 



Developing a Balanced Credit Program 

More emphasis is needed on a balanced credit program for the in- 
dividual farm. Hopkin offers related comments in Chapter 16. There is 
a real need for package credit to cover the entire farming operation. It 
can be provided best in financing the farm as a single unit of operation, 
and not by breaking it down into short-, intermediate-, and long-term 
segments. 

In financing the farming operation, for example, long-term credit 
should be used under the following conditions: (1) when credit is needed 
continuously over a period of years; and (2) when there is a possibility 
that changing economic (or other) conditions will extend the length of 
time the credit is needed. It is not important whether this credit is 
used for a long-term investment or for a series of short-term invest- 
ments. The important consideration is that credit will be needed over 
a long period of time. 

Even in the case of substantial improvement programs, which are 
generally classified under intermediate -term credit, certain rules can 
be followed. As much long-term credit as possible should be used to 
finance such programs with the following limitations: (1) the amount 
probably should not exceed the average amount of credit needed over 
the first several years of the improvement program; (2) amortization 
should be extended over a fairly long period— maybe as long as 10 to 20 
years in some cases— so that repayments will be low; (3) provision 
should be made for a flexible repayment program— advance or deferred 
annual payments and a complete repayment option after a few years 
without penalty. Short-term credit should be used to take care of all 
seasonal fluctuations in credit needs and to provide, for the improve- 
ment program, additional credit which cannot be provided through the 
use of a real estate mortgage. 

This suggests that some method needs to be devised for making 



EVALUATION OF CREDIT MARKET AND INSTITUTIONS 227 

available to the farm landowner an open line of credit, using his real 
estate as collateral security. Expanded use of open-end mortgages on 
farm real estate would more nearly give the farm operator the open- 
line of credit needed to finance the whole farming operation. The open- 
end mortgage materially reduces the cost of new loans because a new 
appraisal, title search, and the like are unnecessary. More and more, 
commercial lending agencies are experimenting with this type of mort- 
gage loan where state laws permit their use. 



Reappraising Partial Amortization 

Since World War I agriculture has experienced a shift from short- 
term nonamortized farm real estate loans to long-term, fully amortized 
farm real estate loans. Certainly this procedure is much sounder than 
earlier policies. Some lending institutions write fully amortized loans 
almost exclusively. Has the American farmer been oversold on fully 
amortized real estate loans? 

Is there not a need and justification for perpetual indebtedness on 
some of our farms? Certainly it would be unwise to recommend per- 
manent indebtedness on a high percentage of the farms in this country. 
But is there any reason why the farm mortgage debt should ever be 
totally repaid on a high-quality 200 -acre commercial Corn Belt farm at 
a 1960 worth of $450 an acre? Is there any reason to reduce the in- 
debtedness below one -fourth or one -third of the current market value? 
If the owner borrowed $200 per acre on this farm initially, is there any 
reason why more than $100 per acre should be included in the amorti- 
zation schedule? 

For example, if this is a twenty -year mortgage, the $200 loan per 
acre could be amortized at the rate of 3 to 5 percent per year until re- 
duced to $100 per acre. At that point, only interest payments on the 
outstanding balance would be required with optional principal payments. 

From a personal standpoint, an individual farmer may want to pay 
off the loan, but from a strictly business standpoint, perpetual indebted- 
ness would be justified and profitable except possibly in a period of 
deep depression such as was experienced in the early 1930's. The 
lender has a riskless loan that yields higher returns than many other 
alternatives, and the permanent investment reduces administrative 
costs on the loan portfolio. The borrower can generally earn more 
than the interest cost of the loan, and the earnings that would have been 
used to amortize the loan can be used to maintain or to improve pro- 
duction efficiency. 



Risk Capital— Other Considerations 

With the rapid technological progress in agriculture, aggressive 
agricultural lenders may well use a small percentage of their loan 



228 HOWARD G. DIESSLIN 

portfolio to encourage the adoption of this new technology. In addition, 
this risk capital can be used to assist young farmers who cannot qualify 
under normal equity requirements, but who have managerial capacity 
and a farm available. Such new technologies would include supplemental 
irrigation, less expensive and more flexible farm buildings, expanded 
application of nitrogen fertilizers, and the like. 

Many such loans can be adequately protected through insurance. The 
use of credit insurance is becoming increasingly common and is cer- 
tainly helpful in reducing the risk or loss on a loan— particularly with 
respect to young operators getting started. 

In addition to credit insurance, life insurance, crop insurance, and 
other similar devices, price -support programs have also reduced the 
over -all credit risk in agricultural lending. These programs, plus the 
continued application of new technologies which make possible greater 
output and increased earnings per man, have all tended to reduce loan 
risk on the average and above -average commercial operations. At the 
same time, they have widened the gap between the below- and above - 
average operators. As a result of this situation, the personal charac- 
teristics and managerial ability of the operator play a much greater 
role in determining the credit risk of the individual farm operator. 



Role of Credit Institutions 

American agriculture is serviced by a comprehensive set of credit 
institutions. In addition, individuals play a dominant role in financing 
the farm real estate market. Individuals selling farm property always 
have the first opportunity to finance the sale. This becomes the major 
means of investment for retiring farm owners. Therefore, they have 
always been large holders of farm mortgage indebtedness. In addition, 
the rapid increase in use of the land contract sale to minimize income 
taxes tends to keep much of the long-term debt in the hands of indi- 
viduals. Insurance companies and insured banks have increased their 
relative holdings of the mortgage debt at the expense of the Federal 
Land Banks since 1940 (Table 13.2). The land banks have increased 
their holdings to some extent since 1950. 

Commercial banks continue to hold over two -thirds of the nonreal 
estate credit among institutional lenders. PCA's have nearly doubled 
their relative holdings since 1940, while the Farmers Home Adminis- 
tration's holdings have materially decreased. No reliable estimates of 
individual holdings of this type of indebtedness are available. 

The nature of credit institutions is such that they finance only part 
of the farming operations— real estate or nonreal estate assets. Com- 
mercial banks can finance the entire farming operation, although their 
assets are not particularly well adapted to farm real estate mortgage 
loans. As a result of the increasing financial complexity of the farm- 
ing operation, it becomes increasingly imperative that long-term and 
short-term lenders coordinate their lending programs to individual 



EVALUATION OF CREDIT MARKET AND INSTITUTIONS 229 

Table 13.2. Distribution of Debt Outstanding by Lenders, 
January 1, 1940, 1950, and 1960 



1940 1950 1960 ; 




Mortgage debt 
(percent) 


Federal Land Banks 
Insurance companies 
Insured banks 
Individuals and miscellaneous 


30.5 16.3 19.0 

15.0 21.0 23.0 

8.1 16.8 13.2 

46.4 45.9 44.8 




Nonreal estate 
(percent) 


Commercial banks 

PCA's 

FHA 


69.5 75.8 73.3 
11.8 14.3 20.7 
18.7 9.9 6.0 



Source: Data supplied by Agricultural Finance Research 

Branch, FERD, ARS, USDA. 
a Preliminary. 

farmers— e.g., commercial banks, insurance companies, PCA's, and 
FLB's. The competitive element in agricultural lending is such, es- 
pecially in commercial sectors of the industry, that agriculture's fi- 
nancial needs currently are serviced as efficiently as other sectors of 
the economy. Any concerted effort to provide additional subsidized 
credit (either low equity financing or interest rates below market 
levels) would encourage existing private lending institutions to leave 
the farm financial market. 

Even under existing competitive conditions in the farm credit mar- 
ket, some private lenders are re -evaluating their agricultural holdings. 
For example, how long will insurance companies aggressively compete 
for a limited number of farm real estate mortgages in the commercial 
farming areas as they have done since 1940? As the economy continues 
to grow, a smaller and smaller portion of their investment portfolio is 
in the agricultural sector. A specialized staff is necessary to solicit 
and to appraise the potential investment. Farm loans are small relative 
to some other types of investment. The cost of obtaining the investment 
is high relative to other investments, particularly where a specialized 
staff making farm loans only is maintained. Farms are not concentrated 
like urban homes. In addition, the life insurance company can finance 
only the farm real estate, not the entire farming operation. This latter 
situation is not unique to insurance companies, of course; it is equally 
true of the Federal Land Banks. Even so, it will not be too surprising if 
as many as one -half of the 15 or 20 major insurance companies making 
farm mortgage loans gradually drop out of the market during the 1960's 
or 1970's. It would be a serious financial blow to American agriculture, 
however, if all major insurance companies pulled out of the farm mort- 
gage market. They are an extremely important competitive element in 
the farm market as well as a large supplier of the total credit needs. 



Chapter 14 

WILLIAM E. HENDRIX 

Agricultural Research 
Service, USDA 

BEN T. LANHAM, JR. 

Auburn University 



Adequacy of Capital and 
Credit for Chronically 
Low-Income Farms 



CAPITAL IS ALWAYS SCARCE. From an economic viewpoint, 
therefore, the term "adequacy of capital" can mean only the quan- 
tity consistent with income maximization. Many believe that not 
only the quantity of capital used, but also the quantity available to low- 
income farmers falls short of such an optimum. This chapter is con- 
cerned with examining this belief to indicate to what extent and under 
what conditions it is true. More specifically, the following questions 
are examined: (1) How much capital do the nation's low -income farm 
operators now use? (2) How much capital do they need in order to 
maximize their incomes? (3) If they need more capital than they are 
now using, how much of this additional capital can they obtain and from 
what sources? (4) If these "needs" cannot be obtained wholly from ex- 
isting credit sources, why not? (5) When the answer to question 4 is 
known, can it still be demonstrated that low-income farmers are using 
less capital than is consistent with optimal interfarm and interindustry 
allocation of capital resources? Specifically, are there real economi- 
cally justifiable needs for more capital in low-income agriculture? 
In examining these questions, consideration will be given only to 
those farm -operator families with net money incomes of less than 
$2,000 from all sources. Such arbitrary delineation of low-income 
farm families is subject to important weaknesses on both economic and 
welfare grounds. However, it permits use of some statistical informa- 
tion not available for low-income farm families delineated on a more 
meaningful economic or welfare basis. 

Based on the 1950 census, this definition would have embraced, in 
1949, 68.3 percent of all farm-operator families in the South and 52.9 
percent of all those in the United States (cf. Chapter 1). In many areas 
of the South it would have included more than four -fifths of all farm 
operators. The percentage of farm families with net cash incomes 
under $2,000 declined between 1949 and 1958 to about 36 percent in the 
United States although, relative to the earnings of nonfarm people, the 
farm income situation worsened during this period. 



230 



CAPITAL AND CREDIT FOR LOW-INCOME FARMS 231 

LOW-INCOME FARMERS USE VERY LITTLE CAPITAL 

Available information indicates that most of the nation's low -income 
farmers use relatively small quantities of land and related capital re- 
sources. This has long been indicated by statistics on the average size 
of farms and amounts of other farm resources in the nation's major 
low -income areas. According to the 1954 Census of Agriculture, total 
land per farm in the South was 167 acres compared with 213 acres per 
farm in the North and 242 acres per farm in the nation. The South had 
only 45 acres of cropland harvested per farm compared with 113 acres 
in the North and 116 acres in the West. The value of land and buildings 
per farm in 1954 was $12,755 in the South, $23,506 in the North, and 
$47,334 in the West. Almost a third of all farms in the South had fewer 
than 30 acres of total land per farm, and 47 percent had fewer than 50 
acres. About half of the South' s farms had fewer than 20 acres of crop- 
land harvested. 

Within major low-income areas, the amounts of resources com- 
manded by low -income farm families are substantially below the aver- 
age for all farm families. For example, in the 24 -county area com- 
prising State Economic Area 12 in northeast Texas, all farm families 
had total farm resources worth $14,762 per family. Those with incomes 
under $2,000, however, had farm resources valued at $9,334 per farm. 
All full-time farmers in this area had total farm resources valued at 
$21,451 per farm. However, those with family incomes of less than 
$2,000 had slightly less than $13,000 worth of farm resources. 1 

\In low-income rural areas, these types of situations and problems 
are not unique characteristics of farm families alone") They are equally 
as important for nonfarm rural families. For example,Cin Rural De- 
velopment "pilot" counties of Alabama in 1957, 50 percent of the farm 
families had family incomes of less than $2,000, whereas 47 percent of 
the nonfarm rural families in these same counties also had family in- 
comes of less than $2,000. In all characteristics measured, these two 
groups of rural families were quite similar^ 

Q In general, the nation's average low-income farm family is probably 
using less than half as much farm resources as do farm families who 
normally have incomes of -$2,000 to $3,000 per year. N » 



LOW -INCOME FARMERS ARE LIMITED IN THEIR OPPORTUNITIES 
TO USE MUCH ADDITIONAL CAPITAL 

It does not follow from this disparity between the value of resources 
used by low-income families and those commanded by farm families in 



1 J. H. Southern and W. E. Hendrix, Incomes of Rural Families in Northeast Texas, Tex. 
Agr. Exp. Sta. Bui. 940, College Station, 1959. 

2 Ben T. Lanham, Jr., Opportunities for Rural Development in Fayette County, Alabama, 
and Edward E. Kern, Opportunities for Rural Development in Chilton County, Alabama, 
(Mimeo.), Ala. Agr. Exp. Sta., Auburn, 1958. 



232 WILLIAM E. HENDRDC AND BEN T. LANHAM 

a more favorable income situation that the nation's low-income farm 
families need— that is, can profitably use —additional capital resources. 
Rather, the extent to which they can profitably use additional resources 
can vary greatly depending upon their labor and management resources 
(cf. Chapters 21 and 23). Because of their limited labor and manage- 
ment capacities, many low-income families may already command as 
large a quantity of farm resources as they can employ productively. In- 
deed, some whose labor capacities have declined because of advancing 
age or illness may be holding more farm resources than are consistent 
with the maximization of their incomes. Even among low-income fami- 
lies with no serious labor or management limitations, many may be op- 
erating near their optimal level because of the kind of general economic 
environment within which they are farming. 

Many Low -Income Farmers are Limited in Their Labor Capacities 

Information provided in the 1950 census indicates that many of the 
nation's low -income farmers are handicapped in their employment al- 
ternatives because of their age, education, and other characteristics 
bearing upon their employability. In the United States the median age 
of farm operators with family incomes of less than $1,000 in 1949 was 
51.9 years compared with a median of 47.6 years for all farm opera- 
tors. Almost two -thirds of the operators with family incomes under 
$1,000 had not completed elementary school compared with 42 percent 
for all farm operators. 

More complete information on the personal characteristics of farm 
families by income levels is being developed in studies by the Farm 
Economics Research Division, ARS, USDA, in cooperation with state 
agricultural experiment stations in selected low-income areas of Texas, 
Louisiana, Mississippi, Tennessee, Florida, Georgia, Kentucky, Mis- 
souri, Michigan, and other states. In these study areas, large percent- 
ages of the low-income farm operators have occupational handicaps of 
kinds that severely restrict their adjustment opportunities within either 
farm or nonfarm work. Mackie directs his attention to public invest- 
ments in human resources in Chapter 22. 

For example, in the 24 counties comprising State Economic Area 12 
in northeast Texas, only about one in 10 farm operator families with net 
money incomes in 1955 of less than $2,000 had an able-bodied male 
family head under 45 years of age who had completed five or more 
grades in school. Martin presents related data on education and educa- 
tional expenditures in Chapter 4. More than a third of the farm fami- 
lies with incomes under $2,000 had male family heads who were 65 
years of age or older. Another third of these farm -operator families 
had male family heads under 65 years of age, each of whom reported a 
major physical disability that limited the kind or amount of work he was 
able to do. Only 5 and 18 percent had able-bodied male family heads 
aged 55 to 64 years and 45 to 54 years of age, respectively. 3 



Southern and Hendrix, op. cit. 



CAPITAL AND CREDIT FOR LOW-INCOME FARMS 233 

In Alabama's rural development "pilot" counties, the average age of 
male family heads for farm families was 53 and for nonfarm families 
48 in 1957. Only 3 percent of farm family heads were under 35 years 
of age compared with 23 percent of nonfarm family heads in this age 
group. The average educational level attained by male family heads 
was 7.2 years for farm families and 7.8 years for nonfarm families. 
Only 2 percent of farm family heads had more than 12 years of educa- 
tion compared with 8 percent for nonfarm families. Nearly 60 percent 
of the male family heads of farm families reported fair or poor health 
compared with about 46 percent for nonfarm families. 4 

These findings, which are fairly typical of those in most of the low- 
income areas that have been studied, reveal that most low -income farm 
families are headed by persons who, regardless of their capital posi- 
tion, are very limited in their adjustment potentials in either farm or 
nonfarm sectors of the economy. It is the lack of labor and management 
abilities rather than the lack of available capital which is the crucial 
limitation to increasing the productivity and income of most of these 
farm families. 

Nonetheless, after accounting for the aged, the disabled, and other 
seriously handicapped classes, there remain many low-income farm 
families in most of the nation's major low-income farm areas who are 
free of these more obvious defects. Available information indicates 
that for most of these families more land and capital are essential to 
improving their incomes through intrafarm adjustments. 



Major Low -Income Areas Will Require Large Structural Changes 
for Productive Use of Much Additional Capital 

The provision of such additional capital, however, while constituting 
a requirement for correcting the low -income problem through intrafarm 
adjustments, would not in itself be a sufficient condition to insure such 
results, except for possibly a small number of carefully selected 
farmers. This is true because even where the low-income farm prob- 
lem exists among able-bodied farmers, it is much more than a result of 
capital limitations. To the extent that it is an economic problem, the 
low-income problem is rooted in large measure in the general struc- 
tural and growth characteristics of the general economy in which it oc- 
curs. It is a manifestation in most severe form of the excess of labor 
resources that characterizes American agriculture generally (cf . Chap- 
ters 3 and 4). As such, it is also a manifestation of agriculture's large 
excess capacity (cf. Chapters 6 and 7). This part of agriculture's ex- 
cess capacity is largely latent, hence, it does not currently result in a 
large agricultural output of the kinds requiring special storage and 
other surplus disposal programs. But that a large capacity for such 
output exists in many of the nation's low -income farm areas is well 



Lanham and Kern, op. cit. 



234 WILLIAM E. HENDREX AND BEN T. LANHAM 

documented in numerous studies of production adjustment opportunities 
made of low-income farms. For example, the results of a study of in- 
dividual farm adjustment opportunities in the Limestone Valley areas 
of Alabama show a net management return for a flock of 4,000 cage 
layers of almost $9,000 after paying for 2,412 hours of labor at 60 cents 
per hour. 5 Similar results were found in North Carolina. 6 Given ade- 
quate markets to stand up under pressure of substantial increases in the 
supply of the farm products that farmers can produce and favorable ag- 
ricultural policy programs, many of the South' s farmers could easily 
double their output of cotton, tobacco, peanuts, and other products by 
increasing their acreages and by using technically superior and eco- 
nomically feasible production methods. 

It does not follow, however, that the placing of large quantities of 
additional capital in the hands of many of the nation's low-income 
farmers would appreciably improve their income situation. Rather, in 
view of the nature of the demand for farm products, the question arises: 
Would the allocation of much more capital to low-income agriculture in- 
crease efficiency of the economy as a whole? Or, would the provision 
of much more capital to this sector of agriculture need to be defended 
mainly on equity grounds? 

Were it not for the large supply and low value of labor in most low- 
income farm areas, the capital now employed would yield very low re- 
turns. For example, even with very low wage rates in 1949, most pro- 
ductivity regions lying wholly within the South had capital returns on 
commercial farms of less than 3 percent— using the residual method of 
calculation. 7 Some researchers have shown a high marginal produc- 
tivity of capital in low-income areas, e.g., in the Piedmont areas of 
Alabama and Georgia. But, besides being subject to question as to how 
well the observations used in such studies have met the requirements 
of the assumptions underlying the estimating techniques used and how 
well they have accounted for risk and uncertainty elements, the market 
assumptions on which these results have been predicated make general- 
izing from these findings to aggregations of more than a few farms a 
questionable procedure. In terms of their underlying market assump- 
tions, measurements of the marginal productivity of capital based on 
Cobb-Douglas equations or other such estimating equations are subject 
to the same aggregative limitations as Wheeler and others have noted 
for "optimal" farm organizations developed with a linear programming 
technique. 8 



5 T. H. Ellis, E. J. Partenheimer, and J. G. Goodman, Costs and Returns from Poultry 
Production in the Limestone Valley Areas of Alabama (Mimeo.), Ala. Agr. Exp. Sta., Auburn, 
1960. 

6 C. E. Bishop and J. G. Sutherland, Possibilities for Increasing Production and Incomes 
on Small Commercial Farms, Southern Piedmont Area, North Carolina, N. C. Agr. Exp. Sta. 
Bui. 117, Raleigh, 1955. 

7 E. G. Strand and E. O. Heady, Productivity of Resources Used on Commercial Farms, 
USDA Tech. Bui. No. 1128, Washington, D. C, 1955. 

8 R. G. Wheeler, review of "Possibilities for increasing production and incomes on 
small commercial farms, Southern Piedmont area, North Carolina," by J. G. Sutherland and 
C. E. Bishop, Jour. Farm Econ., Vol. 39, 1957, pp. 196-97. 



CAPITAL AND CREDIT FOR LOW-INCOME FARMS 235 

The low -income farm problem could and probably would have been 
solved long ago were it merely a result of capital limitations. But the 
capital limitations observed in the nation's low-income farm areas, in- 
stead of being main causes of low incomes, are actually the result of 
other more fundamental conditions that limit both the size of income 
and the building up of large amounts of capital per farm in these areas. 
A high ratio of farm people to land (small farms) and severe limitations 
in effective demand for the kinds of products that they now have the re- 
sources to produce— these are among the main factors that limit both 
(1) adjustment opportunities and (2) current incomes and amounts of 
capital in major low -income farm areas. 

These conditions have probably been important reasons for both the 
relatively small credit advances made by the Farmers Home Adminis- 
tration to its borrowers in many parts of the South and the relatively 
small income gains made by its southern borrowers. In a recent study 
of FHA operating loan borrowers, it was found that borrowers in the 
South increased their average income while on the program by only 
32 percent compared with increases of 69 percent and 63 percent, re- 
spectively, for borrowers in the North and West. Yet, when living 
within equally poor localities as measured by the median income of all 
farm families, families in the North made no greater progress than did 
those in the South. 9 These differences among areas support the hypoth- 
esis that the low -income farm problem is one that can be solved only in 
a small part through individual farm adjustments. This would be true 
even though the amount of capital needed to maximize income was al- 
ways readily available to every low -income farmer. 



THE PROVISION OF MORE CAPITAL TO LOW-INCOME 
FARMERS AS EQUITY MEASURES 

These general observations about the adequacy of capital for chronic 
low-income farms hold not only for u low-income" agriculture but for all 
of American agriculture. Our mounting farm surpluses in the face of 
production controls and large-scale surplus disposal operations under 
Public Law 480 hardly indicate the use of too few capital resources in 
American agriculture. 

In shifting attention from the consideration of agriculture as a whole 
to that of individual farmers, however, it is found that farmers are 
faced with exceedingly critical capital and credit problems. This is 
true because of (1) the rapid farm technological advances of kinds that 
help to increase scale possibilities and (2) the highly competitive char- 
acter of farming which makes necessary the rapid adoption of such 
scale -increasing technologies as a condition of survival. Heady 



9 W. E. Hendrix, Approaches to Income Improvement in Agriculture: Experiences of 
Families Receiving Production Loans Under the Farmers Home Administration, USDA Prod. 
Res. Rpt. No. 33, Washington, D. C, 1959. 



236 WILLIAM E. HENDREX AND BEN T. LANHAM 

stresses this point in Chapter 7. Material increases in production and 
income for chronic low-income farmers depend upon providing (1) more 
productive resources per worker and (2) more opportunities for non- 
farm work for the young people who grow up in these areas but who are 
not needed in farm occupations. The solution to these problems is not 
necessarily in moving marginal farm people into industry, but more 
likely in providing opportunities for greater flexibility and mobility be- 
tween farm and nonfarm employment. 10 Farm technological progress, 
coupled with inelastic demand for farm products and existing impedi- 
ments to the farm -nonfarm transfer of labor, rapidly increases the 
capital requirements per farm without increasing farm income. Scofield 
and Barton develop this point in Chapter 6. 

Briefly, this is the kind of capital problem that faces much of 
American agriculture. Such also are the facts behind the rising ratio 
of debt to income that has characterized American agriculture. Large 
increases in the market value of land to which farmers hold title have 
helped farmers maintain a debt -asset ratio favorable to obtaining in 
general capital markets a large part of the funds they have needed to 
keep up in the farm technological race (Chapter 6). Without marked 
changes in farm credit practices, however, this question arises: How 
long can farmers continue to obtain in the general capital markets much 
of the increasing amounts of capital they will need to maintain their 
present rates of technological progress under the condition of increas- 
ing ratio of debt to income? 

Chronic low-income farm areas differ from more productive farm 
areas in that the former have always been subject to conditions that 
cause low incomes, whereas farmers in the latter areas have at times 
experienced conditions highly favorable to the expansion of their farm- 
ing operations. Having never experienced conditions highly favorable to 
large expansion of their farming operations, the nation's chronic low- 
income farmers have seldom if ever found themselves in a critical fi- 
nancial situation. Instead, many of them have developed deeply rooted 
aversions to indebtedness for any purpose— aversions which, in light of 
past economic expansion opportunities, may have been sound from an 
economic viewpoint (cf. Chapters 20 and 21). 

The fact that the nation's chronic low -income farmers have seldom 
been in a financial situation so critical as to require new special extra- 
market credit institutions (such as our federally -sponsored cooperative 
farm credit program was at the time of its inception and at the time of 
its reorganization and strengthening to meet the financial crisis of 
commercial agriculture in the early thirties) is their only economic ad- 
vantage over farmers in the more productive parts of agriculture. How- 
ever, this advantage does not justify from an efficiency standpoint any 
large expansion in special credit facilities for those farmers now in the 
nation's chronic low -income areas. 



10 Ben T. Lanham, Jr., "Characteristics of Alabama's future agriculture," Flight From 
the Soil: Alabama Agriculture in a Changing Economy, Ala. Bus. Res. Council, Univ. of 
Alabama, 1958. 



CAPITAL AND CREDIT FOR LOW-INCOME FARMS 237 

Rather, in view of the large excess capacity of agriculture as a 
whole, and with the large capacity lying wholly latent in much of the 
low-income agriculture, the case for the more adequate provision of 
special credit facilities in low-income farm areas may need to rest 
largely upon general equity considerations (that is, upon more nearly 
equalizing incomes within agriculture) rather than upon the grounds of 
increasing the economic efficiency of agriculture as a whole. 11 Within 
limits, the more adequate provision of credit to low-income farmers 
as a means of more nearly equalizing opportunity and incomes within 
agriculture is possible within the framework of economically sound 
business credit practices. This position is taken because (1) produc- 
tion innovations, instead of being adopted by all farmers simultane- 
ously, are first adopted by a relatively small number of farmers, and 
(2) the main economic benefits of farm technological advances accrue 
to farmers who are earliest in their adoption. Hence, by coupling spe- 
cial financial assistance with special technical assistance to facilitate 
the early adoption of new and better farm technologies, it is possible 
for a limited number of carefully selected low -income farmers to make 
phenomenal improvements in their incomes and net worth. Woodworth 
and Fanning stress this point in Chapter 23. Examples of such im- 
provements can be found throughout the South among those farmers who 
have been assisted through the FHA program. 12 

How many of the nation's chronic low-income farmers could be thus 
assisted cannot be answered precisely. The number, however, would 
probably represent only a small percentage of all chronic low -income 
farmers. It is doubtful whether much of this increase could be achieved 
without increasing the pressure of supply on demand and lowering the 
income of agriculture as a whole. This is why it is suggested here that, 
viewed from the standpoint of agriculture as a whole, most of what can 
be done through intrafarm adjustments to raise the incomes of low- 
income farmers may need to be defended, if at all, mainly on equity 
rather than on efficiency grounds. 

If the view is accepted that credit policies and programs to raise 
incomes of chronic low-income farmers through intrafarm adjustments 
must rest more upon equity than upon efficiency considerations, the 
question as to how much additional capital chronic low-income farmers 
need in the aggregate must depend largely upon how far it is desirable 
to go in correcting the income disparities that exist merely within ag- 
riculture. Expressed more accurately, it depends upon how equally di- 
vided among farmers should be the extent to which agriculture as an 
industry bears the cost of inefficient resource use. This raises the 
problem of interpersonal welfare comparisons, an insoluble problem in 
economic theory. 



11 For similar treatment of this general kind of problem, see Tibor Scitovsky, Welfare 
and Competition, George Allen and Unwin, Ltd., London, 1952, Chap. 1. 

12 W. E. Hendrix, Capital Accumulation by Families on Small Farms in the Piedmont, Ga. 
Agr. Exp. Sta. Bui. N.S. 8, 1955; W. E. Hendrix, Approaches to Income Improvement in Agri- 
culture, USDA Prod. Res. Rpt. 33, Washington, D. C, 1959. 



238 WILLIAM E. HENDREX AND BEN T. LANHAM 

The provision of capital merely to achieve a more equal personal 
income distribution obviously poses large difficulties. The very nature 
of such a problem virtually rules out the general capital market as a 
source of supply except for the small number of chronic low-income 
farmers who, by being in the vanguard of technological progress, might 
compete successfully with other capital users in general capital mar- 
kets. Hence, chronic low incomes in agriculture cannot be attacked on 
a large scale as mainly capital and credit problems without heavy reli- 
ance upon public grants and subsidies. Capital funds to chronic low- 
income farmers from grants and subsidies have always been scarce, 
also. There is little reason to suppose that they will be any more plen- 
tiful in the near future. Furthermore, such capital transfers, even if 
they were socially acceptable, would probably be one of the most costly 
ways, in terms of effects on general efficiency and welfare, of achiev- 
ing a more equal distribution of income. Alternative approaches to this 
problem are presented in Chapters 22 and 23. 



NEED FOR BALANCING LABOR WITH OTHER RESOURCES 

The low-income problem results primarily from imperfection in the 
functioning of labor markets rather than imperfections in the function- 
ing of capital markets. The labor market imperfections most relevant 
to the low-income problem consist mainly of wage policies in nonfarm 
labor markets which, except in periods of very rapid economic growth, 
permit the supply of labor to greatly exceed the demand. The effects of 
these imperfections in reducing employment are aggravated by price 
policies in other factor and product markets. 

Agriculture as a whole, and especially that in chronic low -income 
areas, is highly vulnerable to the incidence of the underemployment re- 
sulting from such wage and price policies because (1) of its competitive 
characteristics with respect to the freedom and ease of entry of 
workers and its flexibility of labor earnings; (2) underemployment per- 
mits selectivity in the hiring of workers and cor relatively in the distri- 
bution of underemployment that militates more against underemployed 
farmworkers because of their age, education, and other characteristics 
than against their chief competitors for nonfarm jobs; and (3) high farm 
birthrates, declining needs for labor as a result of farm technological 
progress, and the relatively inelastic demand for farm products make 
it necessary for agriculture to export a large number of workers an- 
nually to even maintain its relative income position; hence, agricul- 
ture's vulnerability to the incidence of the economy's underemployment 
is increased. 

Given market structures that permit the backing up and accumula- 
tion of large excesses of labor in agriculture, solution of the chronic 
low-income problem as a resource allocation problem must be found 
mainly in increasing the rate of general economic growth, and thereby, 
the nonfarm demand for labor. Growth of the nonfarm economy's 



CAPITAL AND CREDIT FOR LOW-INCOME FARMS 239 

demand for labor at a rate sufficient to absorb the economy's existing 
underemployment in both farm and nonfarm sectors, in the face of a 
continuing rapid population growth and rapid technological progress, is 
a most basic requirement for correcting chronic low incomes in agri- 
culture as an economic problem (cf. Chapters 1 and 7). 

The drawing off of excess labor from chronic low-income farms 
can be expected in many instances to open up farm expansion opportu- 
nities for the remaining low-income farmers, for which additional capi- 
tal will be needed. There may be a need at the outset for special credit 
facilities, such as those provided by the FHA, to spark the adjustments 
required as such expansion opportunities are opened. As the emerging 
adjustment opportunities are more widely recognized, however, pro- 
vision of the additional capital needed will not likely constitute a major 
obstacle to their realization. In recent years, credit agencies have 
demonstrated a large capacity and willingness to serve the credit needs 
of agriculture, even in low -income areas, where doing so has been con- 
sistent with general economic efficiency in the allocation of resources. 13 



13 W. E. Hendrix, "Meeting the capital and credit needs of southern agricultural develop- 
ment," paper presented at annual meeting of Southern Econ. Assn., Atlanta, Ga., Nov., 1958. 



Chapter 15 



RUSSELL C. ENGBERG 

Farm Credit Administration 



Lenders Problems in Meeting 
Changing Credit Needs 



LENDERS MUST DO MORE than simply provide the amount of loans 
needed if they are adequately to serve the credit needs of a dynamic 
agriculture. The quality of credit service is equally important. In 
this sense, quality includes competent and intelligent evaluation of the 
prospects and risks in the operation to be financed, counseling on finan- 
cial management when appropriate, and adaptation of the credit line to 
the individual requirements, including particularly the schedules of ad- 
vances and repayments. In short, quality takes account of the best in- 
terests of the borrower as well as the safeguarding of the lender's in- 
vestment in view of current and prospective conditions. 

This chapter is concerned with some considerations on the part of 
lenders in providing the quantity, but more particularly the quality, of 
credit required by our rapidly changing agriculture. Some of these 
considerations have been discussed in previous chapters but merit ad- 
ditional emphasis or comment. To a considerable extent, the viewpoints 
will reflect the lending experience and credit policies of the cooperative 
Farm Credit System. 



ADEQUACY OF SUPPLY OF CREDIT FOR AGRICULTURE 

There is general agreement that the total quantity of credit available 
to agriculture is adequate for the needs (cf. Chapters 3 and 12). The 
lenders serving farmers and their cooperatives must compete in the 
market with demands for credit from other segments of the economy. 
This competition is very active since other users of the nation's credit 
supply overshadow the needs of agriculture. On December 31, 1959, the 
total net public and private debt in the United States was $846 billion, of 
which the portion owed by individual farmers was $22.9 billion, or only 
2.7 percent. The agricultural credit facilities appear to be able to com- 
pete satisfactorily with other users for the supply of credit available in 
the market providing, of course, the lenders serving agriculture are 
willing to pay the market rate of interest (cf. Chapters 17 and 18). 

While the over-all supply of credit available to agriculture appears 
to be adequate, individual lenders may find it necessary from time to 
time to restrict lending because of limited funds. Occasionally, 

240 



LENDERS' PROBLEMS 241 

commercial banks find themselves in this position because of inadequate 
capital or heavy investments in other fields. Duggan referred to such 
possibilities in the Southeast in his discussion of Chapter 3. Diesslin 
expressed concern in Chapter 13 about the possibility that some life in- 
surance companies may leave the farm mortgage lending field. This 
would be unfortunate if they should shift investments in that way. There 
are times when the lack of funds restricts lending by the Farmers 
Home Administration. 

But there are enough lenders and the competition is sufficiently ac- 
tive so that if one credit source holds back on new loans for some rea- 
son, other lenders can take up the slack. One can speak more definitely 
about the way the cooperative Farm Credit System functions in this re- 
spect. Its 494 Production Credit Associations and 800 Federal Land 
Bank Associations serve individual farmers in every farm community 
of the nation. Through their fiscal agent and sales organization of sev- 
eral hundred security dealers, the Farm Credit Banks obtain from the 
investment market the loan funds needed by the Associations to handle 
local demands for loans. Experience during some business cycles has 
demonstrated that while interest rates vary with the market, the System 
can obtain whatever loan funds are required even during tight money 
conditions. Funds borrowed by the System in the investment market 
are reaching sizable proportions, totaling $3.3 billion in the calendar 
year 1959, and the System has the expansion capacity to fill any gaps in 
business-type credit service that may develop. 

A further point to be noted in connection with any question about the 
adequacy of the total amount of credit available is that the nation has 
not failed to get needed agricultural production because of a short credit 
supply. On the contrary, there have been charges that lenders have 
contributed to excessive production — as in the case of broilers. In the 
aggregate, therefore, the problem faced by lenders is not whether the 
over-all quantity of credit will be adequate. The critical issue is 
whether they can adapt the quality factors adequately to farmers' needs 
in these changing conditions and still keep risks within limits that can 
be tolerated by business-type lenders. 

Hendrix and Lanham deal with some of these issues as applied to 
low-income farmers in Chapter 14. They conclude that lack of capital 
and credit is not the basic cause of chronically low incomes in agricul- 
ture. The problem arises, rather, from an oversupply of labor and ac- 
companying low returns to labor inputs. The low returns are partly the 
result, also, of low labor and management capacities. 

These circumstances present a problem to business-type lenders in 
cooperating in low-income area improvement efforts. In view of the 
situation described by Hendrix and Lanham, financing risks tend to be 
high. In efforts to assist in local Rural Development programs, the 
Farm Credit Banks and Associations have found that the number of loans 
they can make is limited. As Hendrix and Lanham point out, however, 
there are individual farmers who have the management capacity to use 
capital effectively and who can be financed on a sound basis. Any 



242 RUSSELL C. ENGBERG 

business -type lender attempting to serve low- income areas constructively 
must be competent to identify these farmers and assess their potentials. 
Lenders having adequately trained personnel in their offices may be able 
to contribute substantially to Rural Development programs through credit 
counseling as well as by making loans. 



PROBLEMS OF LENDERS 

Turning now to the problems of lenders in financing commercial 
farmers, there are two areas where the effects of changing agricultural 
conditions need consideration. One is the effect upon needed changes or 
modifications in credit service. The other is the effect upon lending risks, 



Suggested Changes in Credit Services 

Diesslin and others have mentioned a number of changes that are 
needed to keep credit service up-to-date with needs. These ideas in- 
clude intermediate-term loans, partial amortization, open-end mort- 
gages, and package credit. One more feature — greater emphasis on 
credit counseling — might properly be added to this list. 

Intermediate -term loans. The increasing investments in nonreal 
estate capital assets have been accompanied by demands for loans with 
intermediate terms. While lenders may appear to have been slow to 
respond to this need, actually they have financed very substantial amounts 
of intermediate-term types of investments. This has been done by mak- 
ing shorter term loans and then renewing portions used for capital financ- 
ing under appropriate circumstances. Substantial volumes of such re- 
newals are planned in advance when the loans are made. Such financing 
is reflected in PCA loan files by the numerous accounts where loan 
balances fluctuate with seasonal needs but never drop below the amount 
representing capital financing over long periods. 

The PCA's have been writing notes with intermediate terms, also, 
for those farmers who prefer it done that way. Starting in 1955 on an 
experimental basis, the volume has steadily grown, amounting to 12 per- 
cent of all PCA loans outstanding on June 30, 1959. Two aspects of such 
loans should be mentioned. As Diesslin points out in Chapter 13, there 
are certain conditions and circumstances when intermediate terms are 
not appropriate, particularly when the risks are such that close control 
should be maintained by the lenders. The other is that after some ex- 
perience with having separate notes for seasonal and intermediate-term 
credit needs, some PCA members voluntarily turn to the more common 
practice of making an annual review of over-all credit needs and setting 
up a credit program tailored to the specific requirements of the oncom- 
ing year. These two features will continue to limit the amount of PCA 
credit which will show up in the statistics of intermediate-term loans. 

Amortization of farm mortgage loans. The growing interest in 



LENDERS' PROBLEMS 243 

partial amortization of farm mortgage loans is another reflection of 
changes in both agricultural conditions and the values held by farm 
people. At the time the Farm Loan Act of 1916 was enacted, a common 
view was that debt was a necessary evil and a farm free of debt was 
accepted as the goal of all farmers. Amortization was made a require- 
ment for all Federal Land Bank loans in order to hasten the day when 
the mortgage could be burned. 

One effect of changing economic and technological conditions is that 
the urge to retire debt is giving way to the steadily mounting capital 
needs of the modern farm (cf. Chapters 6 and 7). Hence, income or 
funds that might be used to pay off the mortgage can be invested more 
effectively in other parts of the farm business. In recognition of this 
trend, the Federal Land Banks were authorized in 1959 to make loans 
that are only partly amortized, or that will not be amortized at all. 
These new tools will be tried cautiously, and through experience the 
circumstances and conditions appropriate for each type of repayment 
schedule will be worked out (cf. Chapter 17). 

Open-end mortgages. Open-end mortgages, under which a borrower 
could obtain additional advances within stated limits without new ap- 
praisal or a new mortgage, also have been suggested as another way to 
give greater flexibility in credit service. This idea has been discussed 
in the Federal Land Bank system for many years, and one bank has 
tried writing such loans in a very limited way. In principle the idea has 
merit. However, because of wide variations in state laws and because of 
numerous practical operating difficulties, the Federal Land Banks have 
not yet found it feasible to offer this feature of loan service. 

Package credit. For several years Diesslin has been saying that 
"package credit" will better serve the needs of modern farmers than 
financing on a commodity or piecemeal basis. His definition of package 
credit is closely approached in PCA operations. When financing a farm- 
er or rancher, a PCA prefers to furnish all of the credit needs other 
than the long-term real estate loan. The typical procedure in making a 
PCA loan is to set up a budget of the total operation of the farm showing 
expected income and expenses with probable dates and sources. From 
such a plan, the total credit needs can be determined with dates when 
advances will be needed, the sources of repayment, and the dates when 
funds will be available for principal payments. This takes account of the 
total farm operation and makes it possible for all but the long-term 
credit requirements to be handled as one package. It fits the line of 
credit to the needs of the farm as a unit covering both short- and 
intermediate-term requirements. 

A debatable question may be whether this arrangement is seriously 
defective because the long-term credit needs cannot be supplied by the 
same lender. There may be practicable problems for the lender in 
consolidating the long- and short-term financing. The investment mar- 
ket for long-term funds is in effect separate from the market for short- 
term funds, and financial intermediaries tend to become specialists in 
particular types of financing. To a limited extent commercial banks 



244 RUSSELL C. ENGBERG 

can make both long-term and short-term loans from the same general 
source of funds. But lenders obtaining funds from other sources tend to 
be specialists. This tendency is observed in both the agricultural and 
nonagricultural sectors of the money market. 

This institutional arrangement may not be an insuperable barrier to 
working out package service. It may be that the advantages of package- 
type service to the farmer can be realized almost as well through what 
may be called "one-stop service" where both types of credit are avail- 
able under one roof or in adjacent offices. Such close working relation- 
ships between long- and short-term lenders have been developed exten- 
sively by PCA's and FLBA's. Commercial banks which also act as loan 
agents for a life insurance company are another illustration of such 
one-stop service. 

Credit counseling. Still another way in which lenders may adapt 
credit service better to changing needs is through increased competence 
in credit counseling. As commercial farming increases in complexity 
and size, management skill becomes correspondingly more important. 
As capital requirements also increase, skill in financial management 
becomes particularly important. Competent lending personnel to advise 
on such management problems not only can do a better job of loan 
analysis, but also can be of real service to farmers (cf. Chapter 11). 

The Farmers Home Administration and the Banks for Cooperatives 
have demonstrated the value and possibilities of credit counseling. In 
one Farm Credit district, managers of PCA's and FLBA's stated during 
a series of meetings that their current experience with farmers' needs 
and demands indicates advances in credit service to individual farmers 
should be in the area of credit counseling. Business-type lenders will 
need to determine how much time they can afford to give borrowers 
within the limits of available income. They may experiment with charg- 
ing fees of borrowers who wish more attention than can be given under 
the normal income from the loan. Such an arrangement might be similar 
to the "farm management loan" idea advanced by Murray in Chapter 11. 



Effect of Changes in Agriculture on Risk 

In addition to adjustments in credit service, lenders also must give 
attention to changes in risks that may accompany the changes taking 
place in agriculture. In discussing the effects on risks, Diesslin points 
out that since the long rise in farm earnings and farm land values is at 
or near an end, lenders must give closer attention to farm earnings and 
the related capacity to repay debts (Chapter 13). During this period of 
"windfall gains in asset values," lending has been relatively easy. But 
with the present outlook, loan committees have a much more difficult 
job of screening applications and deciding which operators will have the 
necessary debt- repayment capacity. New classes of marginal farmers 
are emerging (cf. Chapter 1). 

Several factors or developments which will affect repayment capacity 



LENDERS' PROBLEMS 245 

generally, and the area of marginal operations particularly, have been 
cited. Technological advances and the rapidly changing size and scale 
of commercial farming operations have greatly widened the difference 
in earning capacity of both farms and operators. This trend will con- 
tinue and will increase the difficulty of screening out those with inade- 
quate earning capacity. 

Effect of differences in land qualities. As far as differences between 
qualities of land are concerned, it has long been recognized that the dif- 
ference in debt-paying capacity between good and poor land is signifi- 
cantly greater than the difference in market values of those classes of 
land. Poor land generally is over- valued, while the best land may be 
under-valued by the market. Most of the losses sustained by the Federal 
Land Banks resulted from lending too much on the poor lands. Losses 
from loans on the better farms were negligible. One effect of the cur- 
rent agricultural revolution has been the widening of the differential in 
debt-paying capacity between good and poor land. If this is the case, 
much more careful appraisal of farm land for loan purposes will be 
necessary. 

Effect of management differences. Of greater importance is the 
widening of differences between individual operators in their ability to 
manage the resources at their disposal. In Chapter 13, Diesslin suggests 
that the real net income to a given "bundle" of resources increased for 
the best third of commercial farms between 1940 and 1960, changed very 
little for the middle third, but has been cut in half for the lower third. 
In other words, he suggests that the change in the differential between 
the net incomes of the upper and lower thirds during this period may be 
indicated by a change in ratios from 3 to 1 to about 8 to 1. These par- 
ticular ratios are hypothetical, of course, and illustrate mainly the di- 
rection of change. This widening differential reflects the differences in 
the competence and ability of farm operators. As scientific knowledge 
increases, as technology advances, and as the amount of capital used by 
individual farmers expands, competent management becomes increasingly 
important. Subject to effects of market conditions, weather, and other 
factors, management accounts for the differences between profits and 
losses in farming more than ever before. 

Management may be of equal or possibly greater importance than 
amount of capital in affecting earnings and debt-paying capacity. In 
Chapter 4 Martin recognized that ample capital is necessary to permit 
the size and character of operation which will yield a satisfactory in- 
come; and credit, of course, is an important way of increasing the cap- 
ital available to a farmer. But Martin points out that there is no gain in 
granting additional credit or expanding the capital resources in some 
other manner to an individual farmer who does not have the ability to 
manage it in a way that will produce a proper return. Productivity of 
capital or credit in the hands of low- capacity managers may not be great 
enough to justify a financing program. 

These arguments emphasize the necessity of taking an even greater 
account of the personal factor in future financing. The personal factor 



246 RUSSELL C. ENGBERG 

has always been of major importance in acting on loan applications. 
The changes occurring in agriculture are making it still more impor- 
tant. Greater emphasis on managerial ability increases the need for 
research work that will describe more completely the earmarks of a 
good manager (cf. Chapters 20-23). Such research results would aid 
lenders in identifying loan applicants who have the ability to use addi- 
tional capital effectively. 

Another widening differential cited by Diesslin is that between com- 
mercial and noncommercial farms (Chapter 13). The smaller noncom- 
mercial farmer simply does not have the resources necessary to produce 
an adequate income. Small farmers are finding out that they cannot com- 
pete and are dropping out and turning to other occupations in increasing 
numbers. The lender, therefore, must be able to distinguish between 
those who can build to a satisfactory commercial level with the aid of 
credit and those who will be better off if they shift to some other way 
of making a living. 

In addition to increasing the problem of the lender in identifying 
operators who will have the necessary debt-paying capacity or who can 
be built up to that level, these developments are calling attention to the 
hazards involved in low-equity financing. In Chapter 17 Governor Tootell 
points out that the conditions that contributed to the success of low-equity 
mortgage loans by the Farmers Home Administration from 1935 to 1960 
and the 75 percent Land Bank Commissioner loans made from 1933 to 
1946 are not likely to be as favorable in the 1960's. Under the present 
outlook for farm income and land values, the risks in making such low- 
equity loans will be far greater than under conditions of rising farm 
income and land values. 



Chapter 16 



JOHN A. HOPKIN 

Bank of America 



Adequacy of Credit for 
Commercial Agriculture 
in a Growing Economy 



THIS CHAPTER is concerned with the problem of financing com- 
mercial farmers. It is a different problem from those discussed 
in some of the previous chapters which have dealt largely with 
poverty in agriculture. As a national problem, poverty in rural areas 
is perhaps more important than financing commercial agriculture, and 
it no doubt demands serious consideration. But poverty is much broader 
than a farm credit problem. We can no more solve the social problem 
of poverty in agriculture with credit than we have been able to solve it 
with an agricultural price support program. In both instances the prob- 
lem is merely perpetuated. 



DEFINITION OF CREDIT 

Credit is defined here as the ability to sell debt. 1 In this sense, 
banks do not extend credit but the borrower does; he exchanges credit 
for cash. Viewed in this way, credit is a commodity which a person or 
firm possesses. It can be both created and destroyed. 

The price which a specified firm's credit can command from dif- 
ferent lenders on a given day in the market likely varies surprisingly 
little if the same facts are known equally to all parties. That is to say, 
the criteria by which a firm's credit is evaluated (priced) tend to be 
quite consistent among lenders in a given geographic area at a given 
time. Of course, these criteria do differ among areas and they do 
change over time. Examples are numerous, even in the twentieth cen- 
tury, where bankers with imagination and courage have developed new 
and bold criteria for pricing the credit of farmers, farmers' organiza- 
tions, and firms serving agriculture. 2 More research is needed to de- 
termine and appraise the processes and criteria by which farm credits 



before the Civil War, Lawyer-Economist Macleod wrote: "If it were asked what dis- 
covery has most deeply affected the fortunes of the human race, it might probably be said 
with truth — the discovery that debt is a marketable commodity." Quoted by John R. 
Commons, Institutional Economics: Its Place in Political Economy, University of Wisconsin 
Press, Madison, 1959, p. 397. 

2 Marquis James and Bessie R. James, Biography of a Bank, Harper & Brothers, New 
York. 

247 



248 JOHN A. HOPKIN 

are valued in the capital market and how these might be modified to the 
benefit of all parties. 

As an illustration, over the years different kinds of insurance pro- 
grams have been developed for, or applied to, agriculture, thereby re- 
ducing some of the risks inherent in farming. Hail and frost insurance 
on crops, fire insurance on farm assets, and life insurance for the farmer 
are examples. Traditionally, farmers use insurance sparingly, relative 
to the risks associated with their business. However, many farmers 
and bankers are aware of the fact that adequate insurance materially 
alters the price of credit. That is, insurance alters the amount of cash 
for which they can exchange their credit or the amount of debt they can 
sell. Whether or not the benefits of a particular insurance program 
exceed the costs is an issue which each farmer must resolve consider- 
ing his own circumstances. More attention should be given to this aspect 
of credit. For example, a wider use of futures contracts by farmers as 
a hedge against price declines can materially increase the volume of 
loanable funds to a potato farmer. Similarly, credit insurance, to which 
Diesslin refers in the closing paragraphs of Chapter 13 and which is 
being used in other areas with apparent success, might well be used in 
financing commercial agriculture. 

The definition of credit as the ability to sell debt makes both clear 
and reasonable the proposition that in order for a farmer to obtain 
money from the capital market he must possess credit. He can no more 
exchange credit for cash when he has no credit than he can exchange 
cattle for cash when he has no cattle. It becomes imperative that farm- 
ers build a strong credit base and credit rating so that this "commodity" 
can be sold at a favorable price in the financial market. As is stressed 
in Chapters 12 and 18, farm credit increasingly must compete with that 
of other industries and businesses for the limited supply of loanable 
funds in the market. 



SOME LIMITATIONS OF BROAD- AGGREGATIVE COMPARISONS 

Based on comparisons of estimated returns to capital in agriculture 
versus other industries, using very broad aggregations, Baughman and 
Wetmore conclude in Chapter 12 that total capital in agriculture appears 
to be in excess of the optimum amount. Similar conclusions using essen- 
tially the same macroanalysis are cited in other chapters. Without dis- 
agreeing, these conclusions based on such broad aggregation are of 
limited use — either in defining agriculture's problems or in developing 
corrective policy. Diesslin correctly stresses in Chapter 13 that agri- 
culture is becoming increasingly varied. The returns to superior man- 
agement have never been so great nor the cost of inferior management 
so severe (cf. Chapter 23). Likewise, differences in land and water 
quality, climate, and scale of operation appear to be increasingly important. 

There simply are too many vastly different universes included in our 
statistics on American agriculture to permit them to be analyzed as a 



CREDIT FOR COMMERCIAL AGRICULTURE 249 

single homogeneous body. To conclude from aggregative comparisons 
that agriculture has no severe capital supply problems, overlooks many 
farms operated by capable managers but located in areas which industry 
by-passed and which have no correspondent ties with metropolitan banks. 
Similarly, such generalization glosses over other areas where new tech- 
nology, new products, or new markets offer investors opportunities for 
unusual financial reward. 

Based on macroanalysis one can easily conclude, as do Baughman 
and Wetmore, that the prospective need is not to attract additional cap- 
ital, but rather to provide for transfer of ownership of assets to fewer 
and larger units. But in regions where agricultural adjustments already 
have occurred, history does not substantiate this claim. For example, 
New England has undergone severe adjustments since 1910. In 1960 
there was but a fraction of the number of farms and farmers which ex- 
isted in that area in 1915. Production has been concentrated into 
relatively few farms. Many farms — including buildings, fences, and 
machinery — have been released from cultivable farming and abandoned 
to unplanned forests. In the process of adjustment, however, much of 
the agricultural capital of the region in 1910-1920 became obsolete. 
New capital was needed to develop the larger, consolidated farms on 
the bottomlands and to equip them with modern buildings, machinery, 
and equipment. 

In the adjustments with which most of agriculture is confronted in 
other areas (although the situation is most critical in the Southeast and 
in the cutover areas of the North Central and Northwest, it is not limited 
to these regions), there will be additional conversions of cultivable land 
into forest, and abandonment of farmstead, fences, and machinery. At 
the same time, with new consolidations of productive land, there will be 
many opportunities for investment in such farm improvements as land 
leveling, drainage, supplemental irrigation, modern machinery, and 
improved foundation breeding stock. Outside capital will be needed and 
attracted. 



THE ROLE OF EQUITY CAPITAL IN AGRICULTURE 

The dominant role of equity capital in agriculture has been empha- 
sized in other chapters. This is the only conclusion one can reach based 
solely on summary tables of the Balance Sheet of Agriculture. The 
author agrees with those who feel that the importance of equity capital 
in financing agriculture has been overemphasized. On a national scale, 
it largely represents inflated values of the same quantity and quality of 
land resources that have existed since about 1920. If land values have 
reached their peak, this equity will not continue to grow. Instead, it 
might decrease. One must look more and more to sources other than 
this traditional form of equity capital to finance agriculture's adjustment. 

In the past, the insistence of many farmers on limiting the rate of 
their firm's growth to that at which the farm family could accumulate 



250 JOHN A. HOPKIN 

equity capital has tended to (1) place the family under such an acceler- 
ated saving program that some aspects of the family's personal welfare 
were neglected, and (2) restrict the scale of operation to less than opti- 
mum for the capacity of management. The situation is beginning to 
change since in some farming areas more emphasis is being given to 
resource control and less to ownership. 

Vertical integration is modifying the equity capital structure in 
some areas, as indicated in Chapter 8. The author does not agree, 
however, with those who point to the existence and growth of vertical 
integration as evidence that financial institutions are failing to meet the 
needs of agriculture. Vertical integration exists for a number of rea- 
sons. The failure of market prices to coordinate sufficiently the deci- 
sions of producers — with respect to quality, timing, and efficiency of 
production — to the desires of consumers is most likely the dominant 
force. Imperfections in the labor and management markets also have 
been factors. Of course, vertical integration could not have occurred 
as it has in poultry production without outside capital. Many of these 
firms have been able to put together such a coordinated production, 
processing, and marketing technology — combined with outside risk 
capital and business management — that they have quality credit to 
market. The individual farmers who are a part of the integrated unit 
had few or none of these vital assets by themselves to begin with. The 
vertically integrated firm is thus able to sell its debt to banks, and then 
"retail" the funds thus derived to the grower under a program of strict 
supervision. Although such supervision is costly, it already is necessary 
to the production process, and little or no additional cost is incurred in 
also supervising the financing. Financing institutions are not able to 
charge a rate sufficient, in most instances, to pay them for making 
"farm management" loans, i.e., loans under close farm management 
consultation and supervision (cf. Chapter 11). 

More important than vertical integration in modifying the future 
capital structure of agriculture will be the increasing use of the corpo- 
rate entity which offers such advantages as: (1) Under corporate organ- 
ization, the continuity of the firm is less dependent on the continued 
survival of specific individuals; (2) it provides greater tax flexibility — 
including income taxes, inheritance taxes, and gift taxes; and (3) it can 
help provide a more continuous supply of capital. The corporate organ- 
ization per se is not in conflict with efficient, commercial family farms. 



ESTATE PLANNING AND TRUST MANAGEMENT 

There is no other industry in which capital assets are a vital part 
of the business where so little attention is given to estate planning. 
Farmers traditionally have given little attention to this matter. And 
yet, few other businesses have as much to lose from inadequate or im- 
proper estate planning. Furthermore, with the changing organizational 
structure of agriculture and the increased role of equity capital owned 



CREDIT FOR COMMERCIAL AGRICULTURE 251 

by parties distinct from management, there is an increasing need for 
experienced trust management of agricultural properties. Commercial 
bank and trust companies are strategically equipped, institutionally, to 
provide this service. Personnel must be professionally trained and 
experienced, however, to manage the agricultural properties. In too 
many instances, trust departments of country banks have the reputation 
of being efficient farm real estate liquidators. 

In defense of their position, however, it should be pointed out that in 
many states the courts do not recognize the differences among manage- 
ment inputs required to manage an agricultural trust as opposed to a 
portfolio of securities. Consequently, the court fails to compensate the 
trustee for the added cost of managing farm properties, and the trustee 
has only one alternative — convert the farm assets into securities which 
can be managed at a cost commensurate with the court's allocation. 
This whole area of estate planning and trust management contains an- 
other very important set of problems for research and extension which 
agricultural colleges and other research groups have largely overlooked. 



GETTING FUNDS FROM SURPLUS TO DEFICIT AREAS 

Baughman and Wetmore correctly stress in Chapter 12 that agricul- 
tural loans are becoming more closely linked with urban and industrial 
supplies and demands for funds. They imply that agriculture's isolation 
and insulation from the forces operating in the financial centers have 
worked to its advantage. They argue that closer linkage with the finan- 
cial centers probably will be disadvantageous to farmers. This is true 
only under very special circumstances — i.e., in periods of very tight 
money, such as the period since mid- 1958. Historically, most isolated 
farming areas have been classified "capital deficit." Isolated independ- 
ent unit banks can loan only a fraction of the bank deposits in that area. 
Their limited funds can be augmented by correspondent city banks, but 
correspondent banking is considerably less effective than a branch 
banking system in equating demand and supply of loanable funds among 
areas and among industries. There are instances where a branch bank 
in an expanding, isolated, and totally agricultural area has had loans 
outstanding equal to nearly four times total bank deposits in that area — 
a loan-deposit ratio unheard of for a unit bank. The impact of these 
funds on the economic development of the locality is tremendous. 

Also, a country bank can augment its loanable funds by organizing 
an agricultural credit corporation with which it can secure funds from 
the financial centers through the Federal Intermediate Credit Banks. 
Because banks failed to utilize this service, Congress established the 
Production Credit Associations in 1933. Local PCA's, operating through 
the FICB's, have been quite successful in funneling funds from surplus 
to deficit areas. 

One important consideration in the adequacy of agricultural credit 
deserves at least passing comment. It concerns organizing agricultural 



252 JOHN A. HOPKIN 

credit institutions so as to minimize the impact on the lender of the 
risks inherent in agriculture. For example, as with unit banks, PCA 
losses in a specific locality are borne entirelyby the local unit. This 
forces association managers and lending committees to be more con- 
servative than they otherwise need be. Since unit banks and PCA's face 
the same problem — concentrating their loanable funds to agriculture in 
a single geographic area — one might expect them to behave in about the 
same way with respect to risk; and, in reality, most of them do. A 
method is needed for broadening the lending base geographically. For 
PCA's, the forthcoming acquisition of the FICB's and the profit and loss 
pooling which this will make possible, should go far in correcting the 
situation. For banks, branch operation must be ranked above correspond- 
ent banking as a means of spreading geographically- oriented agricul- 
tural risks for commercial banks. 



COMPREHENSIVE CREDIT SERVICE 

Much has been said in Chapters 11, 13, and 15 about "package 
credit," a "balanced credit program," or "comprehensive credit serv- 
ice." These terms have been used to mean different things to different 
people. In general, however, the authors have expressed opposition to 
piecemeal financing under which a farmer gets part of his capital needs 
from uncoordinated places for uncoordinated purposes. It is agreed that 
the farmer should be able to secure a complete and well-balanced finan- 
cial meal at one table and, if possible, at one sitting. Time and again 
there are cases where an otherwise sound short-term credit program 
is jeopardized by unwise long-term financing from a different source, 
and vice versa. The advantages of coordinated complete financing with 
one institution are undeniable. 

In Chapter 13 Diesslin suggests that package credit "can be pro- 
vided best in financing the farm as a single unit of operation and not by 
breaking it down into short-, intermediate-, and long-term segments." 
This proposal is questioned here. Diesslin appears to be recommending 
that this complete and balanced meal be achieved by throwing these 
choice ingredients together and serving "hash." Certainly hash is es- 
thetically less satisfying. Furthermore, it requires more confidence 
in the cook — and this is a key issue in an undertaking where mutual 
confidence is critical. An annual "budget" loan designed with — and for — 
the individual farmer and geared to the expected flow of money into and 
out of his business is a useful tool with which to meet a farmer's sea- 
sonal operating expenses. 3 Similarly, intermediate- and long-term 
loans are useful tools with which to meet problems for which they were 
individually designed. Diesslin's recommendations would seriously 
diminish the usefulness of these tools. 



Not only is it useful to the lenders, but to the farmers as well. Our experience is that 
once a farmer has brought his level of planning and management up to the standard required 
to operate within the "spirit" and framework of the budget, he becomes a strong advocate of 
the method. 



CREDIT FOR COMMERCIAL AGRICULTURE 253 

Diesslin further suggests that long-term credit be used when bor- 
rowed capital is needed continuously over a period of years, whether 
the funds are used for a long-term investment or a series of short- 
term investments. He adds that "as much long-term credit as possible 
should be used* to finance intermediate-term improvement programs, 
and suggests that amortization be extended over a long period— 10 to 
20 years in some cases — so that repayments will be low. 

In essence, Diesslin is asking for the kind of financing that a large 
industrial corporation obtains from selling public debentures. This, 
however, requires a type of credit few farmers have to sell. Rather 
stringent conditions must be met before the SEC permits a firm to sell 
debentures to the public. Furthermore, unless the firm is in a strong 
financial position and has a good business reputation, the rate would 
have to be exorbitant to attract risk capital. Consequently, most small 
business firms — including most commercial farms — find that lending 
institutions, rather than the public, are the best market for their type 
of credit. 

Diesslin's suggestions (Chapter 13) for modifying agricultural credit 
programs can be evaluated in terms of three primary issues: 

1. Adequacy of funds. A financial program should make enough 
money available to meet the total needs on which both the farmer and 
lender agree, and should be available when the farmer needs it. The 
suggestions are sufficient on this count, but they are not necessary . 

2. Control. Sufficient control must be provided to assure (a) that 
the money will be used for the purpose for which it was allocated and 
(b) that the expected income derived from the financed activity will be 
used to apply on the loan as agreed by both parties. Frequently this 
control is as essential to the farmer as to the lender. Control is criti- 
cal in all businesses and business arrangements. Controllers' depart- 
ments and budget bureaus do not exist only to make arbitrary rules for 
operating departments. They are a necessary part of every business. 
The more dynamic the business, the more important are planning and 
control. Proper control would be more difficult if all of Diesslin's 
suggestions were followed. 

3. Flexibility. Adequate provision must be made for flexibility in 
the program. In any dynamic business, conditions change — sometimes 
suddenly — calling for a change in plans. Agriculture is classic in this 
respect. The principal argument for Diesslin's request for long-term 
loans to finance short-term investments is to provide a maximum of 
flexibility by allowing the farmer to accumulate and hold cash. He ap- 
pears to favor open-end and partially amortized mortgages for the same 
reason. However, "capital flexibility" comprises more than the form 

in which the loan is made. It requires having uncommitted funds avail- 
able on short notice. The farmer need not have cash if he has credit 
(marketable debt). Therefore, a farmer should not only build up his 
credit rating so that he can exchange it for more capital when he needs 
it; he should reclaim his credit (i.e., pay off his loan) under favorable 
circumstances so that he can again exchange it for capital if and when 



254 JOHN A. HOPKIN 

no credit reserve and, therefore, limited flexibility. Generally speaking, 
a farmer can hold credit cheaper and more securely than he can hold 
cash, and if his rating is good, his credit provides him the same flexi- 
bility as does an equal volume of cash. 

Again, this writer agrees with those who argue for complete package 
financing, wherein the banker and farmer jointly work out a complete 
financing program fully coordinated to meet all the farmer's needs. In 
most cases this program will consist of at least three parts, all of which 
are coordinated so that they dovetail together to form a coordinated 
program. They are: (1) Long-term real estate loans. Flexible pay- 
ments might very well become the accepted procedure for farm real 
estate loans of the future, although partially amortized loans will be 
made only by those lending institutions which have long-run equity- type 
capital to invest. (2) Intermediate loans of various sorts, wherein the 
repayment schedule is geared to the earning capacity (but does not ex- 
ceed the economic life) of the asset being financed. (3) Annual operating 
loans which follow a budget carefully planned to coordinate with the fund 
flow of the farm business. 



NEED FOR AGRICULTURALLY TRAINED MEN IN BANKING 

Obviously, a high standard of performance can be obtained only 
when an alert banker who understands agriculture sits down with a 
competent farm businessman. It is happening, although only in a few 
places. However, in almost all areas progress is being made in bring- 
ing persons trained in agriculture into the banking profession. But this 
process is too slow to meet the needs. Special training is needed for 
those already in banking who have no background in agriculture. Bank- 
ers, of course, are like everyone else in that they have an instinctively 
negative reaction to things they do not understand. Without question, 
the extent to which bankers understand agriculture affects the adequacy 
of agricultural financing. 

The Bank of America in the mid-1950's began special training pro- 
grams conducted by the state university and state college systems. 
These intensive programs are generally of two-weeks' duration. Their 
primary objective is to acquaint bankers with the agriculture of their 
state from a farm manager's or decision-maker's point of view. Four 
such seminars were conducted in 1960, each on a different campus and 
each specializing in a different type of agriculture. These training pro- 
grams are opening up new horizons for many of the Bank's officers, 
helping them to approach the challenge of financing agriculture with 
more understanding and confidence. 

Attention should be directed toward the important differences in the 
capital structure of agriculture in the several geographic regions of the 
United States, and to the significant differences in the institutions, terms, 
and conditions under which capital flows into agriculture in these re- 
gions. Greater attention needs to be given to these differences to de- 
termine why they exist, and to measure their impact on the productivity, 
flexibility, and financial condition of agriculture in each area. 



Chapter 17 



R. B. TOOTELL 

Farm Credit Administration 



Adequacy of Our 
Agricultural Credit 
Structure 



MOST OF THE DISAGREEMENTS over agricultural credit in 
this country stem from differences in interpretation of the word 
"adequate. " The most commonly accepted definition of adequate 
seems to be "sufficient for some specific requirement." This definition 
doesn't help much. The approach to be used here in appraising the ade- 
quacy of agricultural credit is to consider its relevance to public pol- 
icy. The test should be whether or not credit practice implements or 
impedes public policy. 

An attempt is made to analyze broadly our agricultural policy in 
this country with a view to testing credit performance in the light of 
that policy. It has not been possible to reduce the many aspects of our 
public policy for agriculture into an integrated whole against which to 
attempt to evaluate credit adequacy. Therefore, the author has under- 
taken an appraisal of a very fundamental aspect of the broad national 
policy. 

The Employment Act of 1946, in its preamble, emphasized the Objec- 
tive of full, useful employment of human resources in a manner that will 
tend to maximize the production of goods and services that society most 
wants at any given time, and to do this in a manner which will be con- 
sistent with encouraging economic growth, stability, and the free enter- 
prise system. Applying this policy to agriculture is interpreted to mean 
for the future (1) probably considerable decrease in the total number of 
farms, (2) definitely fewer but larger commercial family farms, (3) 
probably a considerable increase in part-time farms as industry expands 
more into rural areas, and (4) drastic reduction in subsistence farms 
over time, down to what may be considered a practical minimum. 

The first three of these four trends have been in evidence for some 
time and may continue, even at an accelerated rate, during the decade 
of the 1960's. The fourth, however, is occurring slowly and the reduc- 
tion in number to a practical minimum will not just happen. It must be 
part of a very specific policy which is adequately implemented. 

SOME CONCEPTS OF ADEQUACY OF AGRICULTURAL CREDIT 

There are two extreme views encountered in evaluating the adequacy 
of agricultural credit. One of these extremes is involved in the 

255 



256 R. B. TOOTELL 

recommendation that credit be rationed as a means of controlling agri- 
cultural surpluses. This may involve a recommendation that credit 
generally to agriculture be restricted, or that it be restricted to the 
producers of specific commodities which at a given time appear to be 
in surplus. There are some, if not many, fallacies and problems in- 
volved in this point of view. In the cooperative Farm Credit System, 
the lenders decision in each individual case is considered to be the 
most practical means of allocating agricultural credit as a resource. 

The other extreme is held by those who seem to believe that agri- 
cultural credit is not adequate unless it is made available to all who 
wish to farm in the amount they need, or believe they need, and on very 
favorable terms. This extreme is mentioned because it is not uncom- 
mon, in spite of being in conflict with the objective of efficient utiliza- 
tion of our human resources. It persists because so many people were 
reared on farms and have a nostalgia with regard to farm life, and they 
find it difficult to accept the economic realities which require fewer and 
fewer families in primary agricultural production. 

Although this chapter deals with appraising the structure of agricul- 
tural credit, it is not the intent here to deal that narrowly with the sub- 
ject. A meaningful appraisal can be made only in terms of performance . 
Structure is only one factor involved in performance; more important 
are the people who extend credit. Their ability, training, experience, 
and attitude largely determine the performance. 

Since colonial times the emphasis in the United States has been upon 
achieving efficiency of the human factor of production. This has in- 
volved associating increasing amounts of capital (including land) with a 
given amount of labor. Certainly the most important aspect of the agri- 
cultural revolution since the beginning of World War II has been the 
substitution of capital for labor in agriculture (Chapters 6 and 7). Dur- 
ing the decade of the 1940*8 a high proportion of this capital accumula- 
tion was financed by farm earnings. However, during much of the dec- 
ade of the 1950's a considerably higher proportion was financed by 
credit (Chapter 11). A fair test of the agricultural credit structure lies 
in the fact that it permitted farmers to increase their borrowings during 
the postwar adjustment of the 1950's from 10.8 billion to 22.6 billions 
of dollars. This test becomes even more significant considering the 
fact that during much of this period the demand for capital was tremen- 
dous and credit stringency existed. The agricultural credit structure 
permitted farmers to compete successfully with commerce and industry 
for limited capital funds. 



WILL THE FUTURE REQUIRE LOW EQUITY 
FINANCING FOR AGRICULTURE? 

Credit will play an increasingly important role in agriculture during 
the 1960's. It will take a great deal of credit to finance the innovations 
and adjustments which are essential for still greater efficiency in 



ADEQUACY OF AGRICULTURAL CREDIT STRUCTURE 257 

production. Integrated operations are likely to become more prevalent. 
Credit may be an important factor in connection with some of these 
operations. If integration develops to the extent that some people visu- 
alize, it could greatly alter the structure for agricultural credit. 

Much has been written about the success some farmers have had in 
contract farming with the integrator furnishing most of the capital. 
These successes sometimes are cited as evidence that farmers can 
succeed even though they have a small equity in their operations. This 
conclusion is not warranted. In the first place, the integrator himself 
must have a good equity in the undertaking. Furthermore, he has the 
advantage of decision making, control, and often other advantages which 
a lender could not hope to have (Chapter 8). The success of a family 
operating under contract is not comparable with one borrowing on a thin 
equity. 

For the greater part of a generation now, urban homes have been 
quite successfully financed with low owner equities. Does it follow that 
a parallel program of low owner- equity financing of farm real estate 
would be equally successful? There seems to be a growing number of 
people who believe that it might. Such a situation is basically different. 
For instance, the city family is not required to invest each year a sub- 
stantial amount of operating funds which may be two or three times as 
much as the net income it may reasonably expect from employment. 
Yet, this is precisely what the farm family does each year, and cer- 
tainly the risk involved is substantial. 

The success of the Farmers Home Administration and its predeces- 
sor agencies in making low equity mortgage loans for farm purchase 
and improvement from 1935 to 1960 is cited as further evidence. Also 
cited is the relatively favorable experience with the 75 percent Com- 
missioner loans made from 1933 to 1946. Both of these programs were 
started when farm income was extremely low and the farm real estate 
market was at a very low point. These two programs were of great 
value to agriculture, but much of the success of both was due to a rising 
level of farm earnings — in fact, involving many years of really good 
earnings — and with it, a rising land market. These factors are not ex- 
pected to be anywhere near as favorable in the 1960 , s. 

Perhaps the most popular appeal for low equity financing is to help 
young people who were reared on farms remain in agriculture and 
achieve the status of owner- operators. The White House Conference on 
Children and Youth was held during the last week of March, 1960. A 
press release issued in connection with this conference dated March 2, 
1960, stated: "We already know that, with scientific advances which 
reduce the need for manpower, less than 15 percent of the young people 
growing up on farms today will stay there in an ownership or manage- 
rial capacity." This statement, made by a high-ranking government of- 
ficial, is quite realistic. The author, having been reared on a farm and 
being a bit of an agricultural fundamentalist, is reluctant to accept this 
conclusion, although the facts point that way. 

Most of these 15 percent will inherit farms through family or 



258 R. B. TOOTELL 

marriage. Others will receive substantial help from relatives, which 
always has been an important part of farm financing. Some will resort 
to part-time farming, which is a relatively new' rung in the agricultural 
ladder. To encourage a larger proportion of young people to stay in 
agriculture by extending them credit equivalent to a very high proportion 
of their total capital needs would be a distinct disservice to them, to say 
nothing of being contrary to a policy of efficient resource use. 

The authors conclusions on the matter of low equity financing for 
commercial family farmers are as follows: 

1. It might be justified if, as a matter of national policy, it were 
decided to encourage more people to remain on farms. This, however, 
is not the case. 

2. Agricultural income outlook for the 1960's does not encourage 
one to believe that low equity financing would be sound. 

3. The aggregate equity of American farmers in their farms is very 
high— approximately 88 percent of the current market value of farm as- 
sets. 

4. Since commercial family farms may be reduced substantially in 
the 1960's, there should be available a higher proportion of farmers 
than ever before with demonstrated managerial ability. The consolida- 
tion of farming units should largely be done by these people, and espe- 
cially by those who have a combination of demonstrated managerial abil- 
ity and substantial equities in their present farm holdings. The land 
ownership adjustments should emphasize keeping farms in strong hands 
which are most likely to succeed in the highly competitive situation that 
lies ahead. 

5. Over-lending is a great disservice to farm families. If real es- 
tate loans are made representing substantially more than traditional 
lending ratios, what relief can be made available when deflation takes 
place? With the high agricultural productive capacity that exists in the 
United States, prices for farm land will not continue the trend upward 
indefinitely. As a matter of fact, some reduction in land prices is al- 
ready overdue. 

These conclusions with regard to financing family- type farms in 
commercial agricultural areas may seem harsh. The author believes, 
however, that they are in the interest of farm people and the nation gen- 
erally. A somewhat different view is held with regard to the matter of 
credit needs in chronically low- income agricultural areas. It has been 
demonstrated that adjustment in these areas takes place very slowly un- 
less special assistance is given. There is no question but that low equity 
financing of the better qualified farmers in these areas, coupled with 
supervision and technical assistance, is necessary to achieving consoli- 
dation, development, and adjustment. This would seem to be primarily 
a job for government credit. 



ADEQUACY OF AGRICULTURAL CREDIT STRUCTURE 259 

FINANCIAL STRUCTURE 

To present a discussion more pertinent to the subject of this chapter 
will require giving some approximate answers to the question: Will the 
financial structure of lenders permit the expansion of agricultural credit 
that likely will be needed to finance the adjustments and innovations that 
seem a certainty for the 1 960*8 ? This question will be approached from 
the standpoint of institutional lenders. 

Commercial Banks 

Commercial banks have been the largest suppliers of agricultural 
credit in the past, and undoubtedly they will continue to be for the fore- 
seeable future (Chapters 3, 5, and 11-13). Governor Shepardson com- 
ments with respect to them in Chapter 18. 

Farmers Home Administration 

The Farmers Home Administration is not particularly handicapped 
from a structural standpoint except, perhaps, in the matter of some un- 
realistic interest ceilings. Its performance is influenced periodically 
by both executive and legislative interpretations of policy and necessary 
implementation. 

Cooperative Farm Credit System 

This system has built up a total net worth exceeding 1.2 billions of 
dollars by 1960. Of this, 18 percent is represented by government cap- 
ital, 28 percent by farmers' capital, and 54 percent by earned net worth. 
In addition to this capital structure, the Banks for Cooperatives, the 
Intermediate Credit Banks, and the Production Credit Associations have 
access to certain revolving funds which may be made available by the 
Treasury if loan demands require it from a ratio standpoint. 

The Federal Land Banks would be able approximately to double their 
2.4 billions of dollars of real estate mortgage loans if necessary. 

The Banks for Cooperatives have a capital structure which would 
permit them to more than double their lending volume. Farmer cooper- 
atives are expected to play an increasingly important role, especially 
as integrators and as bargaining agents for farmers. They will have 
need for larger amounts of credit. 

Production Credit Associations have a capital structure which, 
taken with revolving funds that could be made available to them, would 
permit a doubling of their loan volume. 

The Federal Intermediate Credit Banks, which have had a very 
rapid growth in loan volume since 1955, would not be able to double 



260 R. B. TOOTELL 

their volume of business unless additional capital were made available 
for ratio purposes. 



SOME OBSERVATIONS ON THE COOPERATIVE CREDIT SYSTEM 

The cooperative Farm Credit System has decentralized its opera- 
tions to a great extent. It has also experienced a very rapid growth in 
loan volume which has increased by approximately 105 percent since 
1954, reaching a peak of $4 billion in 1959. This was during a time of 
considerable money stringency, a period in which the system proved it- 
self capable of competing for funds in the capital markets. As a matter 
of fact, some of this increase in volume occurred because competing 
lenders were short of funds or chose more profitable nonagricultural 
investments. This period has proven that the greatest value of the coop- 
erative Farm Credit System is the dependability which it has demon- 
strated in making credit available to qualified borrowers at all times. 

The Farm Credit System imports capital funds from urban centers 
rather than relying primarily on local capital for loan funds. Production 
Credit Associations, for instance, do not compete with local banks for 
deposits or other types of customer services. They are simply in the 
specialized business of making agricultural loans. 

The purposes for which loan proceeds from the System may be used 
are very broad. They are not available just for farm needs. Many 
family needs— including housing, household equipment, and funds for 
education of children— have been met over the years with both Land 
Bank and Production Credit Association loan proceeds. There have even 
been instances in which loan funds were permitted to finance a family 
member, no longer needed on the farm, to become established in a com- 
mercial enterprise away from the farm. The Farm Credit Banks and 
Associations have been making reasonable adjustments to the rapidly 
changing agricultural situation. Some of the innovations that bear citing 
are: 

1. Federal Land Banks 

a. More realistic loan levels. The constant problem is to main- 
tain a balanced position. That is, the extension of loans which 
are sufficiently large to be helpful, but which will not unduly 
contribute to land market inflation. 

b. Loans to part-time farmers. 

c. Loans to family farming corporations. 

d. Loans on timberland. 

e. Complete removal of loan limits (amount that can be loaned). 

f. Five percent bond rate ceiling removed January 1, 1960. 

g. Nonamortized and partially amortized loans. Legislative 
authority for these types of loans was granted recently and 
some experimentation is to be conducted. 



ADEQUACY OF AGRICULTURAL CREDIT STRUCTURE 261 

h. Authority to defer principal installments for periods up to 
five years. 

i. Real estate loans in Alaska. The Federal Land Bank of Spo- 
kane has made several. 

2. Banks for Cooperatives 

a. Perhaps of as much importance as the money loaned has been 
the counseling and assistance with financial management which 
the Banks for Cooperatives have given to farmer cooperative 
associations over the years. This continues to be an impor- 
tant contribution. 

b. Commencing in 1956, the structure of these banks was changed 
to provide for systematic investment in their capital by farmer 
cooperatives and a corresponding retirement of government 
capital. 

c. An important innovation which some of the banks have adopted 
has been the interest "escalator clause" in their loans. This 
provision for varying the interest rate periodically with the 
change in cost of money to the banks has been occasioned by 
the rather drastic variations in mortgage interest rates in re- 
cent years. 

3. Credit Banks and Production Credit Associations 

a. Many changes have been made to simplify operations in these 
institutions. Production Credit Associations have made a 
major contribution to agricultural lending with the budgeted 
loan program which they pioneered many years ago. 

b. Since their inception, Production Credit Associations have 
made loans to part-time farmers. 

c. Intermediate- term loans have been an important part of the 
business of Production Credit Associations for many years. 
It is, however, only since 1955 that they have been making 
such loans based specifically on three- to five-year notes. 

d. Financing purchases by patrons of supply cooperatives. In the 
late 1950's this program gained considerable momentum in 
about half the Farm Credit districts. 

In the matter of structure, there is little to say by way of criticism. 
Considerable amending legislation since 1953 has resulted in structural 
improvements. If the cooperative Farm Credit System were to be ini- 
tiated now with the knowledge available from experience since 1917, 
there would not be three separate bank systems. Possibly there would 
be only one, but at the most, two bank systems. One would be a Bank 
for Cooperatives and the other a bank lending to individual farmers for 
all of their operational needs. 

Tools are available for doing a good, constructive, sound job. In the 
matter of performance, a rather wide range of accomplishments is ex- 
hibited. The Federal Land Banks often do not use a great deal of 



262 R. B. TOOTELL 

ingenuity or effort in attempting to fit loan payment terms to the needs 
of individual borrowers. There is too much of a tendency for a district 
bank to adopt either the standard (equal total installments) or Spring- 
field (equal principal and consequently declining total installments) type 
of loan amortization and to stick to it for all or practically all loans, 
regardless of which best fits the borrower's needs. Also, the term of 
years for which a loan is made tends to be stereotyped by districts. 
There is some tendency to strive for uniformity as between annual and 
semiannual installment billing, rather than have it coincide with the 
borrower's income pattern. For years the Land Banks have had the 
privilege of deferring loan principal installments for as much as five 
years. This tool is used almost exclusively in servicing problem cases. 
It could often be used at the beginning of the lending period to give the 
borrower the opportunity to make further improvements to his real es- 
tate or add to his livestock or equipment in a manner that would imme- 
diately increase his earning position. 

One can prove almost anything as to performance among the 494 
Production Credit Associations. There are still a few of the "country 
club" type which are quite content to serve their limited number of 
members, that are extremely proud of their record of no losses, and 
which are overly obsessed with the idea of protecting their reserves. 
Fortunately, there are very few of these. On the other hand, there are 
a substantial number of Production Credit Associations that extend very 
constructive credit service. In between they shade both ways, but the 
record indicates that the majority approach the latter category. Not 
enough of the Production Credit Associations are jointly housed with 
Federal Land Bank Associations, which would facilitate a closer work- 
ing relationship in the borrower's interest. 

As for the Banks for Cooperatives, the author has little criticism 
since they presumably are making available more than 50 percent of the 
credit used by farmer cooperatives. Their business is characterized 
by generally rather large loans and the unique specialized counseling 
services available to cooperatives. 



SOME CONCLUDING OBSERVATIONS 

Our agricultural credit "complex"— made up of individuals, com- 
mercial banks, cooperative credit, and government credit— is a very 
desirable arrangement. These four categories have no rigid spheres of 
influence and tend to complement each other as well as to furnish some 
wholesome competition. 

Most discussions of the adequacy of credit have to do with quantita- 
tive aspects. The qualitative dimension of agricultural credit is of al- 
most equal importance, viz., the matter of counseling on farm business 
analysis and financial management. Most directors and managers of 
the Farm Credit System's associations strive to achieve this person- 
alized constructive service. Even the most successful of these men 



ADEQUACY OF AGRICULTURAL CREDIT STRUCTURE 263 

probably are not aware that they are "rationing capital into agriculture 
on a marginal productivity basis," but they strive to make constructive 
loans which will maximize the income of the farm family and offer the 
best prospects of repayment. 

No appraisal of the adequacy of agricultural credit would be complete 
without consideration being given to the probable behavior of lenders 
during periods when farm income is seriously squeezed. Historically, 
individuals extending credit to farmers are in the poorest position to 
grant forbearance, be they merchants, fellow farmers, or even relatives. 
They seldom have the resources to permit them to grant forbearance 
over a very long period of time. 

Local banks usually retrench and tighten up on credit extension dur- 
ing periods of agricultural income stringency. The behavior of insurance 
companies under these conditions varies considerably. In case of de- 
pression they may be confronted with demands from their policyholders 
which will require strict collection policies. 

It is the policy of the cooperative Farm Credit System to grant for- 
bearance to borrowers who are making an honest effort but who are con- 
fronted with inadequate income due to no fault of their own. Fine demon- 
strations of this policy were witnessed when farmers and ranchers in 
the southern plains area experienced several successive years of severe 
drought in the early to mid- 1 950*8. The effectiveness of such a policy 
was also demonstrated in the Mississippi delta area when widespread 
crop losses occurred due to very poor harvesting conditions in 1957 and 
1958. Not since 1940 have the banks and associations generally been 
put to a real test. Since then their net worth position has been built up 
substantially, and it is assumed that they will use constructively the 
various types of forbearance which are legally available to them. 

Certainly adjustments must be made in credit to adapt it to the needs 
of a dynamic agriculture, but business principles cannot be stretched 
very far without disservice to both borrower and lender. It is impor- 
tant to remember that credit can be substituted for income only within 
rather narrow limits and for short periods of time. It is not an enduring 
form of farm relief. 



Chapter 18 

Adequacy of Credit 



CHARLES N. SHEPARDSON 

Federal Reserve System 



Structure As Related to 
Commercial Banks 



THE GROWTH in amount and changes in type of the credit needs of 
agriculture have been discussed at length in other chapters of this 
book. Therefore, those points which appear to be pertinent to a 
discussion of the role of commercial banks in the agricultural credit 
structure will be summarized briefly. First, however, three points that 
should merit our attention will be mentioned in connection with the broad 
problem of agricultural credit. 



GENERAL PROBLEM OF AGRICULTURAL CREDIT 

Agricultural credit is no longer an isolated or local problem (Chap- 
ter 3). It is subject to the same influences that affect the rest of the 
economic community and must bear its share of the problem of balancing 
the national demand for credit with the supply of saving. Credit markets 
have become more unified because of better information and communi- 
cation. Funds that originate in one section of the country are no longer 
confined to outlets in that area but seek the most advantageous invest- 
ment outlet throughout the economy. By the same token, those in need 
of funds have access not merely to local sources but also, directly or 
indirectly, to many other sources of credit. This situation has not al- 
ways been true. There was a time when local credit conditions were 
insulated to a considerable degree from general credit conditions in the 
nation. The development of the whole farm credit system, together with 
structural changes in the commercial banking system and in the regula- 
tions governing it, has served to facilitate the mobilization and allocation 
of credit resources as needed throughout the country (Chapter 19). 

The second factor that must be recognized in this connection is the 
decline in the proportion of agricultural credit to total credit. In 1929, 
the first year for which reliable figures are available, farm debt was 
about 6 1/2 percent of total debt. In 1959 this relationship had decreased 
to less than 3 percent. The reason for this relative decline, of course, 
is that farm production is a declining proportion of a constantly growing 
total. Over the same thirty-year period, the ratio of agricultural prod- 
uct to total product declined from 9 1/2 percent to about 4 1/2 percent. 
It is interesting to note, however, that the ratio of farm debt to farm 

264 



ADEQUACY AS RELATED TO COMMERCIAL BANKS 265 

product ended this three- decade interval at about the level at which it 
started. 

A third factor at work in the money and capital market is the fact 
that new additions to capital investment are continuing to "pay off in 
the form of additions to net earnings. In this connection, it is important 
to keep in mind that economic growth, about which there is so much 
comment, is dependent upon increased productivity per man-hour of 
labor. This increased productivity, spurred by advancing technology, 
is implemented primarily through the substitution of capital for labor 
(Chapters 6 and 7). The doctrine of economic maturity that was ex- 
pounded in the 1930's has been proven utterly fallacious. Capital has 
continued to be increasingly productive in many fields, and especially 
so in agriculture. One of the big questions in connection with our future 
growth is whether sufficient savings can be generated to provide the 
capital essential for further technological advances in productivity. 
This, in turn, leads to the problem of allocating available funds to the 
most productive use, a problem which will be discussed more fully. 



CHANGES IN CREDIT NEEDS 

The need for larger, more efficient units and the accompanying de- 
mand for land, augmented by the demands of urban expansion and infla- 
tion hedge- buying by investors, has resulted in a greatly increased de- 
mand for mortgage credit. There has been growing concern, however, 
over the continuing rise in land prices in the face of declining farm 
commodity prices and a corresponding reduction in rate of return on 
farm real estate which in 1959 fell to an average level of approximately 
3 percent. This, together with some reduction in inflationary pressure, 
may account in part for the withdrawal of some of the investors from 
the market and the apparent leveling off in farm land prices. In any 
event, there is still need for further consolidation of farm units, and 
there is likely to be a continuing strong demand for mortgage credit in 
all cases where the resulting increased productivity can show a profit- 
able return on the investment (Chapters 7 and 12). 

The increased use of purchased inputs has resulted in a growing 
need for short-term production credit. The biggest change, however, 
results from tremendous technological advances in machinery, equip- 
ment, and facilities, and shifts in major farm enterprises together with 
major land improvements incident to irrigation and drainage, all of 
which call for greatly increased amounts of intermediate- term credit 
geared to the repayment potential of the operation. 

In summary, farmers need varying but increasing amounts of long-, 
intermediate-, and short-term credit (Chapters 11 and 13). While spe- 
cific uses may be assigned to those several types of credit, the fact is 
that the several farm enterprises and even the family living expenses 
are closely interwoven with the success of the operation as a whole. 
One of the major problems in the future will be the generation of 



266 CHARLES N. SHEPARDSON 

sufficient savings to provide the capital essential to economic growth. 
This means that at all times lenders will need to allocate credit care- 
fully and with a close eye to the constructive use and continuing profit- 
ability of credit. Adequacy of collateral is important, but extension of 
credit for an operation that does not give promise of improving the re- 
payment potential of the borrower and that depends upon attrition of 
equity for its liquidation is of questionable value to either the borrower 
or the lender. For these reasons there are real advantages in handling 
the farmer's various credit needs through one source (Chapters 11, 13, 
and 15-17). 

From the standpoint of the lender, farm loans in general are rela- 
tively small and the cost of servicing is correspondingly high. Further- 
more, if attention is to be given to the constructive use of the loan, the 
lending institution must be staffed with trained personnel who can ap- 
praise the loan in terms of its value to the borrower's total operation 
and in light of his total financial position. This can be better and more 
economically done by one lender who is familiar with the total problem 
than by several who are only interested in separate parts of the opera- 
tion. The farmer, too, is better served by one lending agency which is 
familiar with all phases of his operation and the interrelationship of his 
several credit needs. 



ROLE OF COMMERCIAL BANKS 

As holders of demand deposits, commercial banks are limited by 
liquidity needs in the amount of long-term assets that they may hold. 
Hence, the holding of farm real estate loans which are relatively non- 
liquid must be limited. Nevertheless, commercial banks are an impor- 
tant source of farm mortgage credit, and on January 1, 1959, they held 
$1,443 million of mortgage loans, or approximately one- eighth of the 
total and over one- fifth of the institutionally held loans (Chapter 5). 
Furthermore, many banks have established connections with insurance 
companies and other long-term lenders whereby such lenders take over 
the loan and engage the bank to handle its servicing. 

In loans other than for the purchase of land, commercial banks have 
always held a dominant position, and on January 1, 1959, they held ap- 
proximately $4 billion of such loans out of a total of $9.5 billion other 
than CCC loans (Chapter 11). However, the changes in size and type of 
farm operations and the accompanying change in size and type of credit 
needs, including the tremendous expansion in need for term credit with 
terms adjusted to the flow of income and repayment potential, have pre- 
sented many problems. It is true that some small country banks have 
found the credit needs of their larger farm customers to exceed their 
loan limits. In such cases they have usually been able to secure partic- 
ipation from their city correspondent banks although occasionally they 
may have had to send the borrower elsewhere for his needs. 

In the intermediate- term field, the problem is further complicated 



ADEQUACY AS RELATED TO COMMERCIAL BANKS 267 

by the need for more adequate analysis of the total operation in order to 
establish realistic terms, and also by the need for more competent su- 
pervision of the loan. Many bankers make what are essentially 
intermediate- term loans on a short-term basis with tangible or intangi- 
ble commitments as to renewals. As long ago as 1921, the U. S. Depart- 
ment of Agriculture, in a study of bank lending practices, criticized the 
unrealistic terms of many farm loans and said, "Some means must be 
found for providing the crop and livestock producers with credit running 
for such terms as the nature of their business demands." It should be 
remembered, however, that banks did little term lending of any kind at 
that time.' Only relatively recently have they ventured into term loans 
for business and, still more recently, into consumer installment loans. 
Notwithstanding these later development, a Federal Reserve study of 
farm loans in 1956 indicated that 60 percent of the banks rarely made 
nonreal estate loans with maturities of longer than one year, and only 9 
percent made extensive use of longer term maturities. 

For many years commercial banks generally resisted term loans to 
farmers, partly at least, on the assumption that such loans were frowned 
on by the federal supervisory agencies. Any impediment stemming from 
that cause was removed some years ago when the federal supervisory 
agencies issued a statement that there is no federal law or regulation 
prohibiting intermediate- term loans to farmers, and that, "Like all 
classes of loans, each loan of this type should be evaluated on the basis 
of its own characteristics, the risk involved, the character, ability and 
financial responsibility and record of the borrower, value and character 
of collateral, and the feasibility and probability of its orderly liquidation 
in accordance with the repayment plan. " 

While no statistics are available on developments in this area, there 
are some indications of a marked upward trend in the use of term loans. 
This has doubtless been accelerated in part by the increased activity of 
other lending agencies in this area. A further indication of such a trend 
is the increasing use of agriculturally trained men by commercial banks. 
According to the figures of the American Banker Association, approxi- 
mately 900 banks had men so qualified in 1960 compared with 300 in 1950. 
Most of these men were located in the larger country banks. Many small 
country banks seem to feel that they do not need or cannot afford such 
specialized help. In some cases, however, their needs in this connection 
are served by the agricultural departments of their city correspondents 
who have found this to be a worthwhile and much needed service. In such 
cases the city bank farm loan man frequently assists the country bank in 
the analysis of the farm business, appraisal of the loan, and establish- 
ment of terms, and then may agree to participate in the loan to the ex- 
tent desired by the local bank. Unfortunately, some city banks with a 
large clientele of small country correspondents have failed to see the 
opportunity for a real service to their correspondents in this area. 

Commercial banks can, and many are doing, an excellent job of meet- 
ing the total credit needs of farmers on an enlightened and realistic 
basis so far as terms and amounts are concerned. With the assistance 



268 CHARLES N. SHEPARDSON 

of insurance companies and other long-term lenders in the mortgage 
field, and with the cooperation of forwardlooking city correspondents in 
over- line participation and in appraisal and supervision of larger and 
longer term loans, they are able to render competent and efficient serv- 
ice to their borrowers. Through the handling of all of the farmer's needs 
in one package, they can reduce the cost of servicing and supervision 
and at the same time provide him with a more convenient one- stop serv- 
ice (Chapter 13). 

The Agricultural Commission of the American Bankers Association 
is working diligently to promote the interest of more banks in this type 
of service. The amount and complexity of farm credit needs are bound 
to increase, and it is axiomatic that, unless present lenders meet that 
need, other agencies will be developed to fill the gap. At the same time, 
it should be remembered that available credit should be allocated first 
to its most productive uses in the interest of long-term economic growth 
— especially in times of credit stringency— and that such uses will in 
the long run be most profitable to the borrower, the lender, and the com- 
munity. By the same token, not all requests for credit can or should be 
met, since extension of credit to an unsound and losing operation even- 
tually results in loss to all concerned. Unqualified borrowers might be 
better advised to liquidate their operations and get into something with 
a more promising outlook rather than to hang on to a losing proposition 
and risk the gradual attrition of the equity they possess. 

Finally, while many banks have a higher loan to deposit ratio than in 
many years and, hence, may need to be more selective in the allocation 
of available credit, there is no reason to believe that they will not be 
able to meet all legitimate credit needs of agriculture. It must be re- 
membered, however, that with increased credit demands and with agri- 
culture representing a smaller part of total needs, farmers may face 
increasing competition from the rest of the economy for available funds. 



PART IV 

Values and Education 

in Relation to Capital Use 

and Productivity 

► Philosophical Values 

► Socio-Psychological Values and Attitudes 

► Facilitating Changes in Values and Attitudes 

► Human Resource Investments 



Chapter 19 

G. L JOHNSON 
LEWIS K. ZERBY 

Michigan State University 



Values in the Solution 
of Credit Problems 1 



THE PURPOSE of this chapter is to indicate how value studies can 
contribute to the solution of agriculture's credit problems. The 
method is historical and the approach is philosophic. 
For purposes of clarity in presentation, it will be necessary to have 
a vocabulary. The discussion will be based also on various assumptions 
and distinctions not readily apparent in the vocabulary. The vocabulary 
and meanings attached to the words discussed are presented below. 

Concept denotes either a word or a sentence which has a specifiable meaning. 

A belief is the meaning of a concept about the nature of reality. This reality 
includes values. There are not only factual beliefs related to descriptive states 
of affairs, present or future, but also normative beliefs which include values in 
all senses that this word is used. In actual occurrence, beliefs include psychologi- 
cal imaging and symbolic expression, but these are not relative to the present 
discussion. 

A fact is the meaning of a concept of "what is" or "what will be." 

A fact concept is a word or sentence which has as its meaning an actual state 
of affairs, present or future. 

A value or normative belief is the meaning of a concept of "what ought or ought 
not to be." 

A value concept is a word or sentence which has as its meaning a state of af- 
fairs which ought to be or ought not to be. 

An instrumental value is the meaning of a concept of "what ought or ought not 
to be" for which the "ought" is derived from a more basic value. For example, 
the concept "a man ought to have money" may be based on the more basic value 
concept that "a man ought to be able to provide food and shelter for his family." 

A more basic value contrasts with an instrumental value in that it is a goal 
for the sake of which instrumental values are actualized. More basic values may 
ordinarily be actualized by means of a number of different instrumental values. 
In the example above, providing food and shelter for a man's family might be 
realized by other means than having money. It should be noted that an instrumen- 
tal value detached from the more basic value with which it is connected may very 
well be tenuous in a sense. 

An action is an attempt to establish or attain a specified condition. 

A goal is a condition, not yet established or attained, which some entity is 
trying or could try to attain. 



lr The authors are indebted to Roy Gift, Dale Hathaway, Paul Hurrell, Richard Rudner, 
and Vernon Sorenson for constructive criticisms and suggestions. 

271 



272 GLENN L. JOHNSON AND LEWIS K. ZERBY 

A right action or goal is an action or goal determined to be the best in view of 
the factual and normative beliefs involved where "best" means "that which maxi- 
mizes human interests and purposes as indicated by the value concepts involved." 

A wrong action or goal is an action or goal other than the right action or goal. 

Good and bad are adjectives used to modify the word value according to whether 
the value under consideration is of the nature "what ought to be" or "what ought not 
to be." 

Right and wrong are adjectives which will be used to modify the words "action" 
and "goal." 

True and false are applied to sentences when they are supposed to express 
beliefs which do or do not conform to reality. 



ASSUMPTIONS 

It is assumed that (1) values can be known and that such knowledge 
exists; (2) values can be arranged in systematic structures; and (3) 
knowledge of values is not essentially different from scientific or em- 
pirical knowledge. Since these assumptions may shock those persons 
who ascribe to certain schools of thought or points of view having to do 
with the philosophy of science, these assumptions will be elaborated 
upon and clarified. These are matters which cannot be proven any more 
or less than the axioms of Euclid that the sum of two and two is four — 
or the law of variable proportions. 



Values Can Be Known and Such Knowledge Exists 

Let us start neither with physical science nor with metaphysical 
speculation. Let us start rather with the facts of human values and ask 
what is already known about them. 

First, it is known that human values are real, but that they are not 
all of reality. Secondly, it is possible to have knowledge of values, al- 
though this knowledge is not a minor branch of physical science nor is 
it a non- naturalistic intuition of moral predicates. Scientists concerned 
with a study of values will do well to examine political, legal, and eco- 
nomic history. Such an examination makes it obvious that value concepts 
exist, are cognitively meaningful, and can be judged as good or bad. In 
other words, value concepts form a part— and an important part— of the 
world of our experience. As long as this part of our world is ignored, 
or exiled outside the province of reason, it will continue to be a source 
of disturbance and unrest. 

Philosophers who have argued that value judgments are meaningless 
have tended to overlook the distinction between the content of a value be- 
lief and the attitude one has toward this content. Human beliefs may be 
described in terms of their contents, or in terms of the attitudes people 
have toward these contents. One believes, for example, that Chicago is 
west of New York. The factual content of this belief is Chicago's being 
west of New York. One's attitude toward the content of this belief may 



VALUES IN THE SOLUTION OF CREDIT PROBLEMS 273 

be one of gladness or sadness, or indifference. In any case, the content 
is the same. 

Those who hold that knowledge of values does not exist tend to de- 
fine values in terms of the attitudes held toward the contents of value 
judgments. To say "charity is good" according to this view is translat- 
able into "I approve charity; do likewise. " A criticism of this point of 
view will be made when positivism is examined. The position taken here 
is that whether or not charity is good depends not on one's attitude toward 
charity, but upon the nature of the world as it ought to be or ought not to 
be— just as Chicago's being west of New York is independent of one's 
attitude toward this state of affairs. In other words, value judgments 
are not merely subjective but may be objective. 2 

The content of value judgments showing first how the knowledge of 
such structures is not essentially different from other knowledge is 
discussed below. 



Value Concepts Can Be Arranged in Systematic Structures 

The content of beliefs may be factual, formal, or normative. The 
descriptive sciences have impressively organized factual beliefs; the 
formal sciences (mathematics and logic) have done the same for formal 
beliefs; whereas normative beliefs have been largely neglected. How- 
ever, there has been an encouraging increase in concern for normative 
beliefs and their organization. Writings like Edwards' Logic of Moral 
Discourse 3 and Edel's Ethical Judgment 4 take up the problem of struc- 
turing norms. 

The problem of structuring beliefs of a normative type is not basi- 
cally different from the problem of structuring factual or formal beliefs. 
In a science (be it factual or normative) the sentences which make it up 
are clearly stated, consistent with each other (i.e., contradictions are 
avoided), and can be applied fruitfully to the world of experience. If one 
departs from these criteria in normative matters, he leaves reason and 
enters areas of superstition, dogma, or blind intuition. Unfortunately, 
an over- emphasis of the difference between factual and normative mat- 
ters has tended to cause men to do just this on normative matters. 



2 "Value judgments need not be, and are not all, in some incurable way, subjective. For 
in some cases when a man affirms that a thing is good, or that one thing is better than an- 
other, there are ways of finding out objectively whether what he is saying is true. . . There 
is in some cases evidence sufficient to determine that the assertions he has made are as a 
matter of fact justified and what he has said can be believed to be true." --Frederick L. 
Will, "Values, objectivity, and democracy," in Essays in Political Theory, M. R. Konvitz 
and A. E. Murphy (eds.), Cornell University Press, Ithaca, N. Y., 1948, p. 276. Note the 
difference between this conception of objectivity and the conception which would make ob- 
jectivity dependent on some religious criterion or natural law. In the latter case objectivity 
is outside the boundaries of evidence and justification while in the former it is defined in 
terms of evidence and justification. 

3 Paul Edwards, The Logic of Moral Discourse, The Free Press of Glencoe, Illinois, 1955. 

4 Abraham Edel, Ethical Judgment, The Use of Science in Ethics, The Free Press of 
Glencoe, Illinois, 1955. 



274 GLENN L. JOHNSON AND LEWIS K. ZERBY 

Normative realism, the position taken here, is concerned with 
structuring normative beliefs in a reasonable fashion. This is why the 
study of law is so valuable. In systems of law, an objective set of 
norms is used which succeeds or fails publicly, and this public success 
or failure makes it possible to examine the structure of norms and the 
place of reason in its creation. 



Knowledge of Values Is not Essentially Different 
From Empirical or Scientific Knowledge 

It becomes possible to understand this thesis only when people begin 
to take seriously the contents of normative beliefs. Men who imagine 
that reality is made up entirely of factual states of affairs or matters of 
fact which metaphysically correspond to the contents of factual beliefs 
are not likely to take seriously the contents of normative beliefs. It is 
only as one doubts the metaphysics of physical realism that he can take 
seriously the metaphysics of normative realism. If one takes seriously 
the reality of norms, then the problem of structuring norms is at least 
as important as the problem of structuring facts. 

But people since the Middle Ages have been mistakenly persuaded 
that factual beliefs correspond to reality and are objective, whereas 
normative beliefs do not correspond to reality and are subjective. What 
does it mean to say that factual beliefs correspond to reality? For one 
thing, it means there is inter- subjective agreement about the facts. 
One's belief that Chicago is west of New York is objective because he 
can make predictions in terms of it, predictions which experience proves 
to be reliable. 

Turning to normative beliefs, at first sight there appears to be no 
such agreement or possible verifiability. Yet in those areas in which 
men have worked out conceptual schemes to describe normative beliefs, 
one finds that there is inter- subjective agreement and possible verifi- 
ability. There is impressive agreement about normative reality, and 
there are predictions which are successfully confirmed in the area of 
law. In this area there is as much reason to believe that values are 
real as that facts are real. 

The lawyer or jurist is not concerned primarily with the concepts or 
laws of the physical sciences. Rather, as a lawyer, his chief concern is 
with norms, and the subject of this concern is as real to him as is the 
physical world for the physical scientist. 

But the most impressive argument for normative realism is that of 
common sense. The man on the street knows that his beliefs about values 
are about the real world. As a matter of fact, for most people the phys- 
ical world has only a peripheral sort of reality. Of greater importance 
in the world of common sense are the worlds of religion, love, and poli- 
tics. In other words, the worlds of religion, sex relations, and political 
activity are worlds which really concern the average man. Physicists 
can discover new laws, new elements, and new theories without 



VALUES IN THE SOLUTION OF CREDIT PROBLEMS 275 

producing a ripple in the public mind unless values are involved. But 
let a religious leader conduct a crusade, some hero fall in love, or some 
politician advocate public ownership of the means of production, and the 
public mind may be stirred to its depth. 

The problem is not one of creating an interest in norms, nor one of 
making the common man believe in their reality. Interest and belief al- 
ready exist; the problem is one of structuring those beliefs in an intel- 
ligent way, that is, in such a way as to make them clearly understood 
and logically coherent. 

Let us now turn to an examination of some philosophical positions 
which would hold either that knowledge of values is impossible or that 
such knowledge is essentially different from empirical or scientific 
knowledge. The philosophic positions to be examined are normative re- 
alism, logical positivism, and intuitionism. 

The logical positivists have asserted that the meaning of a proposi- 
tion is its mode of verification. This sort of meaning criterion has been 
taken to rule out normative judgments as being meaningless since they 
can be neither verified nor falsified. 5 Such a meaning criterion may be 
compared to the value experience of the intuitionist who holds that the 
meaning of such terms as "right" and "good" are unanalyzable, non- 
natural, simple intuitions. Such intuitions, according to intuitionists, 
are as primitive in man's experience as sense- data and can hardly be 
explained by other concepts. 6 But what is needed is neither a simple 
meaning criterion nor an unanalyzable value intuition. What is more 
useful is a systematic meaning context, whether this be the context of 
ethics or of science. 

Too much stress, perhaps, has been placed on a discussion of osten- 
sive definitions and reduction to a verification basis in the philosophy of 
science. What the scientist finds far more useful is a consideration of 
explanations and theory construction. 7 Similarly, in ethics there has 
been too much emphasis on individual value intuitions and too little atten- 
tion paid to the total context of ethical discussions. This context may be 
describable either in terms of one's personal morality, or a society's 
subjective morality, or that objective morality known as a legal system. 
In any one of these cases the meaning and validation of a particular 
value judgment is to be explicated by putting the individual statement 



5 In Language, Truth, and Logic, A. J. Ayer writes: "If . . . I . . . say, 'Stealing money is 
wrong,' I produce a sentence which has no factual meaning. ... I am merely expressing cer- 
tain moral sentiments. . . . We can now see why it is impossible to find a criterion for deter- 
mining the validity of ethical judgments. It is not because they have an 'absolute' validity 
which is mysteriously independent of ordinary sense-experience, but because they have no 
objective validity whatsoever." Reprinted in O. A. Johnson, Ethics: a Source Book, Holt, 
Rinehart & Winston, Inc., New York, 1958, pp. 475-76. 

6 G. E. Moore in Principia Ethica writes, "... 'good' denotes a single and indefinable 
quality." A. G. Ewing in The Definition Good, The Macmillan Co., N. Y., 1947, p. 45 writes, 
"... 'goodness' cannot be defined wholly in non-ethical terms." 

7 For reading on this topic, see Carl G. Hempel, "The theoretician's dilemma," Minn. 
Studies in the Philosophy of Science, Vol. II, pp. 37-98; and Carl G. Hempel, "Problems and 
changes in the empiricists' criterion of meaning," Revenue Internationale de Philosophic, 
Jan., 1950, pp. 41-63, reprinted in Leonard Linsky, Semantics, University of Illinois Press, 
Urbana, 1952. 



276 GLENN L. JOHNSON AND LEWIS K. ZERBY 

into a systematic context. Some believe that this would resolve the 
problem of the so-called dichotomy between value judgments and factual 
statements. 8 Upon examination of such a context of ethical discourse, 
one would discover that the universe of discourse appropriate to ethical 
discussion can be judged in terms of the same criteria as those used in 
ordinary science. 9 These criteria are consistency and clarity . 

In his book on the Nature and Significance of Economic Science, 
Lionel Robbins defends the positivistic thesis that: "Economics deals 
with ascertainable facts; ethics with valuations and obligations. The two 
fields of enquiry are not on the same plane of discourse. Between the 
generalization of positive and normative studies there is a logical gulf 
fixed which no ingenuity can disguise and no juxtaposition in space or 
time bridge over. 10 

But, on the next page he states that, "All this is not to say that econ- 
omists may not assume as postulates different judgments of value, and 
then on the assumption that these are valid enquire what judgment is to 
be passed upon particular proposals for action. " Here, the economist 
seems to be dealing with valuations, for how could he otherwise assume 
them as postulates and apply them to actions ? Nor is this the only way 
in which the economist "deals with" valuations. Robbins also states that 
economics "makes it possible for us to will with knowledge of what we 
are willing. It makes it possible for us to select a system of ends which 
are mutually consistent with each other," 11 and that economics "enables 
us to see what sets of ends are compatible with each other and what are 
not, and upon what conditions such compatibility is dependent. And, in- 
deed, it is just here that the possession of some such technique becomes 
quite indispensable if policy is to be rational. " 12 

Robbins has presupposed the following: (1) Judgments of value may 
be assumed as postulates; (2) economists can deal with valuations; (3) it 
is possible to have a knowledge of what we are willing; (4) ends cannot 
only be known, but can be put into consistent or inconsistent systems; 
(5) sets of ends can be judged (and assumed to be judged cogitatively) to 
be compatible or incompatible with each other; (6) a technique for mak- 
ing sets of ends compatible is a prerequisite for rational policy making; 
and (7) policy can be rational. 

If these presuppositions are accepted, it is difficult to understand 
why ethics and economics are not on the same plane of discourse. Nor 
is it possible to have a very clear idea of the presumed "logical gulf* 
which separates the two. 



8 If the place of reason in ethics is the same as the place of reason in science, and both 
use the same method of validation, it is difficult to see why anyone should insist on a di- 
chotomy. 

9 Kenneth Boulding, The Image, The University of Michigan Press, Ann Arbor, Michigan, 
1956, p. 11. "... although I shall argue that the process by which we obtain an image of 
values is not very different from the process whereby we obtain an image of fact, there is 
clearly a certain difference between them." 

10 Lionel Robbins, Nature and Significance of Economic Science, Macmillan & Co., Ltd., 
London, 1935, p. 148. 

11 Ibid., p. 152. 

12 Robbins, op. cit., p. 154. 



VALUES IN THE SOLUTION OF CREDIT PROBLEMS 277 

Perhaps the philosophy which has come closest to the sort of con- 
sideration of value recommended here is that of pragmatism. The prag- 
matist has been more willing than the positivist to attempt the sort of 
dialectic of purposes which ethics amounts to. This sort of ethics is in 
the mainstream of American philosophy and is to be found in such writ- 
ings as George Santayana's Life of Reason , 13 R. B. Perry's General 
Theory of Value , 14 and M. R. Cohen's Reason and Nature. 15 Using 
Dewey's pragmatism, however, one finds problems, for there are times 
when he loses the essential objectivity of both science and ethics in a 
kind of Wild- West Hegelianism. Dewey's philosophy "substitutes data 

for objects Objects are finalities; they are complete, finished. . . 

but data signify materials to serve; they are indications, evidence, 
signs, clues to and of something still to be reached; they are interme- 
diate, not ultimate; means, not finalities." 16 > 17 But unless data are taken 
to signify something other than further data which signify still further 
data, it is hard to see how one makes his knowledge actually apply to a 
real world. 

In ethics, Dewey holds that one cannot distinguish between ends and 
means. This is at best misleading. While it is true that the same action 
may be in one situation a means and in another situation an end, this 
does not mean that one cannot distinguish objectively between the two. 
One may argue that there is really no distinction between premises and 
conclusions because the same proposition may be a premise in one ar- 
gument and a conclusion in another argument. Although this is true, it 
is nevertheless the case that premises and conclusions are different, 
and different in objective ways. 

There is, however, a basic inconsistency in Dewey's thoughts on this 
topic, for often he writes as if the good were the satisfaction of social 
interests. This notion of goodness that is experimentally determined as 
the intelligent satisfaction of human needs and desires is never, to our 
knowledge, a mere means- end in Dewey's philosophy. Thus this utili- 
tarian conception of goodness is incompatible with his means- end con- 
tinuum. What makes pragmatism unsatisfactory here is its reluctance 
to take seriously the possibility of achieving knowledge of things as they 
are. In much of Dewey's writing the objective world seems to fade away 
into a metaphysical monadology of situations, and the would-be scientist 
sinks into a subjective morass without objective footing. 



R. B. Perry, General Theory of Value, Harvard University Press, Cambridge, Mass., 
1950. 

M. R. Cohen, Reason and Nature, The Free Press of Glencoe, Illinois, 1953, revised 
edition. 

16 John Dewey, "The quest for certainty," reprinted in Classical American Philosophers, 
M. H. Fisch (ed.), Appleton-Century-Crofts, Inc., 1951, pp. 348f. 

17 The Wisconsin institutionalists are closely related to Dewey on this matter. See Ken- 
neth H. Parsons, "The value problem in agricultural policy," Agricultural Adjustment Prob- 
lems in a Growing Economy, Iowa State University Press, Ames, Iowa, 1958, pp. 285f. For 
a statement of the connection between John R. Commons and pragmatism, see Glenn L. 
Johnson, "Value problems in farm management," Jour. Agr. Econ., June, 1960, p. 9. This 
same discussion points out a possible "identification" problem in the thinking of Dewey as 
reflected in the work of Parsons via Commons. 



278 GLENN L. JOHNSON AND LEWIS K. ZERBY 

When one turns to the sort of analysis of value statements made by 
positivists, he finds at the basis of this discussion a failure to distinguish 
between ethical beliefs as such and attitudes held toward these beliefs. 
In any belief, one should be able to distinguish between the content of 
the belief and the attitude held toward this content. This is as true in 
ethics as it is in any descriptive science. The content of ethical beliefs 
are human purposes and interests. Such purposes and interests belong 
as much to the world of reality as the facts of chemistry, and the atti- 
tudes one has toward these interests and purposes should always be kept 
distinct from the purposes themselves. In terms of their essential nat- 
uralism, both pragmatism and positivism can be contrasted with Kantian 
formalism and intuitionism. However, pragmatists have been more will- 
ing than positivists to attempt the sort of dialectic of purposes which we 
have called ethics. On the other hand, the pragmatists have tended to 
lose the essential objectivity of both science and ethics, an objectivity 
basic for any knowledge. 



DISTINCTIONS 

In addition to the assumption presented and supported above, two 
distinctions will also be maintained in the following paragraphs. These 
distinctions are (1) between normative science (descriptive and analyt- 
ical) and moralizing and (2) between factual and normative beliefs on 
one hand and science and ethics on the other. 

When one examines existing systems of values, it is possible to be 
quite objective in the examination and to avoid the sort of moralizing 
and preaching which has characterized so much writing in ethics. That 
it is possible to be objective (at least in the sense of objectivity pre- 
sented here) while discussing values should be obvious from the pre- 
ceding discussion, and it should be clear that it is not at all necessary 
to confuse exhortation with normative science and analytical moral 
philosophy. 

The distinction between factual and normative beliefs is a distinction 
between two sorts of objective reality. Factual beliefs are directed 
toward matters of fact, or states of affairs; normative beliefs are di- 
rected toward things as they ought to be, or ought not to be. In recogni- 
tion of this distinction, there have been those who would hold that science 
concerned with the former must be methodologically distinguished from 
ethics concerned with the latter. The thesis presented in this chapter 
is that science and ethics, while concerned with different subject mat- 
ters, are not methodologically distinguishable. 18 



18 Kurt Baier, The Moral Point of View: A Rational Basis of Ethics, Cornell University 
Press, Ithaca, N. Y., 1958; Abraham Edel, Ethical Judgment, The Use of Science in Ethics, 
The Free Press of Glencoe, Illinois, 1955; Paul Edwards, The Logic of Moral Discourse, 
The Free Press of Glencoe, Illinois, 1955; Oliver A. Johnson, Ethics, A Source Book, Holt, 
Rinehart & Winston, Inc., New York, 1958; E. H. Madden, The Structure of Scientific Thought, 
Houghton Mifflin Company, Boston, Mass., 1960; Stephen E. Toulmin, Reason in Ethics, 
Cambridge University Press. New York, 1950. 



VALUES IN THE SOLUTION OF CREDIT PROBLEMS 279 

The discussion thus far has furnished a vocabulary, some assump- 
tions that appear reasonable, and has informed the reader about certain 
distinctions which will be important in that which is to follow. The next 
step is to tie the philosophic discussions presented above to the problem- 
solving processes of society by considering certain aspects of the history 
of farm credit in the United States. 



HISTORICAL SUMMARY 

The history of farm credit problems and of steps taken to alleviate 
them furnishes some interesting examples of how values have been 
handled by society and agricultural economists. Solutions to past agri- 
cultural credit problems have ranged from (1) solutions based on the 
acceptance or rejection of alternative hypotheses about the nature of 
present or future reality, (2) through solutions obtained by changing 
reality to agree with "what ought to be," (3) to solutions based on choices 
among partially developed fact value concepts. Other interesting aspects 
of farm credit history in the United States include (1) the substantial 
role played by economists in the study of values as well as the study of 
facts in arriving at recommended "right" actions, (2) the few times, 
proportionately, that "explosive situations" 19 have arisen in connection 
with the work of agricultural economists on questions of value, and of 
right and wrong actions with respect to credit, and (3) the large number 
of generally acceptable policy decisions which have been reached on 
such credit problems. 

Examples will be drawn from the period 1870 to 1960. The "Green- 
back movement" (1874) symbolizes a major agrarian revolt against the 
economic disadvantages of farmers. One of the major disadvantages 
involved their credit institutions. Values formed in this period continue 
to color thinking on farm credit problems. 

Land credit became an important issue at the end of the 19th cen- 
tury. The Country Life Commission was created in 1908, and the Fed- 
eral Farm Loan Board was established in 1916— partly as an outgrowth 
of the work of that commission. Further legislation was enacted in 1923 
when the Agricultural Credit Act was passed. The depression of the 
1930's drew further attention to other shortcomings of our farm credit 
institutions. In 1933 the Farm Credit Act established the Farm Credit 
Administration with production as well as land credit services. The 
Farm Security Administration had evolved out of its predecessor agen- 
cies by 1939. It and its predecessor agencies experimented with differ- 
ent possible solutions to the credit and resource problems of farm peo- 
ple not serviced by commercial or other governmental credit agencies. 
Also, various credit institutions have been set up to alleviate financial 
problems arising from disasters such as drought, floods, etc. Credit 
facilities to service farm cooperatives were established in 1933. In 



The Iowa oleomargarine case is an example of what is meant by an "explosive situation. 



280 GLENN L. JOHNSON AND LEWIS K. ZERBY 

addition, the storage of surplus farm products has been financed in a 
variety of ways. The nature and adequacy of credit institutions are 
discussed in detail in Part III. 



Some Examples of Credit Problems Which 
Were Solved by "Getting the Facts " 

Two subtypes of problems fall under this heading: First, there are 
problems of the form "if so and so ought to be, what is the best way of 
obtaining it," or "if so and so ought riot to be, how is the best way to 
prevent it from being." Second, there are problems of the form "what 
or which best describes present or future reality." While many agri- 
cultural economists advocate that the work of agricultural economists 
should be restricted to answering questions of these two types, exam- 
ples are difficult to find in the history of farm credit. And, those which 
are found are often of minor importance involving the operation of credit 
institutions to attain previously agreed upon goals or to carry out an ac- 
tion previously determined to be "right." Evidence of this may be found 
in Chapters 13 and 17. 

Almost everyone has had experience with the techniques of belief 
formation by credit institutions in evaluating loans on real estate and 
durables. The beliefs which credit managers formulate about the condi- 
tion of one's security, net worth, character (that is, one's system of 
values), earnings, and expenditures aid in solving the credit managers' 
problem as to whether or not to make a loan. (See, e.g., Chapter 25 and 
discussion by E. M. Norman.) Between such decisions and decisions on 
major policy questions is a continuum ranging from operational problems 
solved almost exclusively by obtaining answers to factual questions, 
through those involving answers to questions of policy in the initial ab- 
sence of generally accepted answers to questions of value. Thus, the 
examples to be presented here are semi- operational in nature and do 
not involve major policy issues in farm credit. 

At one time a farm credit problem arose for the Production Credit 
Associations (PCA's) and various cooperatives which were selling sup- 
plies and equipment to farmers. A substantial amount of production 
credit used by farmers is extended by farm supply houses. Overexten- 
sions of such credit often impaired PCA loans and produced financial 
troubles for farmers and farmers' supply cooperatives. It was agreed 
that it would be good to coordinate the extension of such credit and PCA 
loans. Note the objective nature of this consideration. The agreement 
did not simply amount to a group of people sharing the same attitude 
toward the world. The agreement was about the value of a world in 
which credit extension was coordinated with PCA loans. And the reality 
of such knowledge required no special value intuition. The question was 
one of predicting the outcome of various methods of bringing about this 
coordination. By 1960 at least two production credit districts had pro- 
grams in effect for providing this coordination. One of these is known 



VALUES IN THE SOLUTION OF CREDIT PROBLEMS 281 

as the reserve program; the other, as the guarantee program. In one 
instance, both the farmer and the cooperative provide a reserve against 
bad loans. In the other case, the cooperative guarantees the loan by co- 
signature. The first program is used most extensively in Michigan, but 
is proving only moderately workable. Consideration is being given to 
shifting to the guarantee program in order to increase workability. 



Some Examples of Credit Problems Involving Differences 
Between Partially Developed Concepts About 
"What Ought To Be" and "What Is or Can Be" 

These examples are of two types: those involving independent ends 
and means, and those involving interdependent ends and means. Both 
types involve the process of forming beliefs about values and facts; how- 
ever, interdependent means and ends do not necessarily involve inter- 
dependent fact and value concepts. 

In writing about the Federal Land Bank system in 1955, Murray 
Benedict stated: "The individual lender cannot afford to buy a mortgage 
on a farm halfway across a continent, which he probably has never seen 
and whose owner he does not know. Even when he does know the farmer 
and his security, the risk of going wrong on a single farm is too great. 
As a consequence, loan funds have often been very inadequate in many 
rural, capital- deficit areas, even when savings accumulated in other 
sections of the country were seeking an outlet. It was to overcome this 
difficulty, and to provide an orderly and safe channel for the transfer of 
such funds, that the Federal Land Bank system was created." 20 If Bene- 
dicts statements were considered out of context, one might conclude 
that here was a simple case of solving a problem with factual concepts. 
Under this supposition, the necessary belief concepts would involve pre- 
dictions about how the Federal Land Bank system would serve to channel 
credit from lenders to borrowers. Actually, however, both value and 
factual concepts had to be created and clarified over the 15- to 20- year 
period involved. Once developed, these value and factual concepts be- 
came the basis for the compromise represented by the Federal Farm 
Act of 1916 between the "goods" and "bads" involved in view of what was 
possible. While fact and value concepts were developed and systema- 
tized simultaneously, there is little direct evidence that the values of 
the ends and means were interrelated. In some instances the "bads" in- 
volved consisted of giving up some "goods" as dictated by the nature of 
reality as revealed by beliefs. While this process of giving up one good 
to attain another within available means does establish an exchange value 
between the two, this is quite different from interdependence between 
means and ends or facts and values. 

The history of farm credit involves several studies of the facts with 



20 Murray R. Benedict, Can We Solve the Farm Problem? —An Analysis of Federal Aid 
to Agriculture, The Twentieth Century Fund, New York, 1955, p. 124. 



282 GLENN L. JOHNSON AND LEWIS K. ZERBY 

the hope of helping to find the best means of attaining a previously agreed 
upon set of values. One such study was entitled Risk Problems of the 
Production Credit Associations . 21 This study was authorized by the 
members of the district Farm Credit Boards in 1950, and carried out 
by a committee of agricultural economists, general economists, and a 
research director, and included four heads of agricultural economics 
departments in land- grant colleges. The committee was to review and 
appraise. It reviewed, but limited its appraisal to "presenting for dis- 
cussion and consideration certain methods of improving the ability of 
the PCA's to meet the risk inevitable in agricultural lending." The five 
methods included (1) strengthening PCA finances, (2) setting up a mutual 
loan insurance reserve, (3) setting up a group reserve for contingencies, 
(4) consolidation of production credit agencies of lending and discount, 
and (5) consolidation of the production (chattel) and mortgage (real es- 
tate) credit units of the Farm Credit Administration. This effort was 
discussed and supplemented with much informal study of the importance 
of spreading risks. Partially developed value concepts which had to be 
completed and clarified were also involved. These included the "good- 
ness" of a self-supporting, independent link between borrowers and 
lenders. Congress passed the Farm Credit Act of 1956 upon the recom- 
mendation of the Federal Farm Credit Boards. This Act put method 4 
into effect by providing for the merger of the Production Credit Corpora- 
tion into the Federal Intermediate Credit Bank of each district. Numer- 
ous smaller steps have been taken to put method 1 into effect. Method 5 
is still under discussion. Recently, representatives of the Farm Credit 
Administration approached agricultural economic researchers at Michi- 
gan State University with the request that they consider doing research 
on the advantages and disadvantages of a "one- stop credit program" to 
make coordinated production and mortgage credit available to farmers 
without separate visits to a Production Credit Association and a Federal 
Land Bank Association. Thus, method 5 may eventually be adopted. 
This idea was discussed previously by Diesslin in Chapter 13, Engberg 
in Chapter 15, and Tootell in Chapter 17. 

The second type of problem involving differences between interde- 
pendent concepts about the values of means and ends is hard to illus- 
trate. Consultation with members of the Michigan State University 
agricultural economics staff who have worked on credit problems failed 
to produce a clear-cut example of such problems. Similarly, an exami- 
nation of a number of historical accounts dealing with agricultural credit 
problems and policies failed to produce clear-cut examples. The Wis- 
consin institutionalists who derived their ideas from John R. Commons 
hold that such problems are the type most generally encountered. Com- 
mons, in turn, based his ideas on the pragmatism of John Dewey and 
C. S. Pierce. 22 Our inability to illustrate the case which the Wisconsin 



21 F. F. Hill, William G. Murray, George H. Aull, R. J. Saulnier, E. L. Butz, and A. R. 
Gans, Risk Problems of the Production Credit Association, Preliminary draft for discussion 
purposes, subject to revision, December 31, 1950. 

22 Kenneth H. Parsons, "The value problem in agricultural policy," Agricultural Adjust- 



VALUES IN THE SOLUTION OF CREDIT PROBLEMS 283 

institutionalists feel is most frequently encountered certainly raises 
questions about the generality of that case. However, this failure to 
find a clear-cut example of the kind of problem represented by the case 
should not indicate that the institutional point of view is without merit. 
The difficulty may be that the recorded history of the solution of agri- 
cultural credit problems is not detailed enough to reveal the interde- 
pendence by the value of means and ends held to be general by the Dewey 
pragmatists. Or, the difficulty may be that experiencing "what ought to 
be" and "what is or can be" simultaneously makes us believe that we 
cannot separate them in conceptualizing. The simultaneous occurrence 
of facts and values does not necessitate the interdependence of concepts 
of fact and concepts of value 23 any more than the simultaneous existence 
of shapes and colors makes it impossible to distinguish them intellec- 
tually. 



Some Examples of Conflicting Value Concepts in the 
History of Farm Credit Policy 

The examples to be examined here come largely from the history of 
the Farmers Home Administration and its predecessor agencies, though 
there is at least one important problem of conflicting value concepts in 
the history of the Farm Credit Administration. The work of these two 
credit agencies are discussed in Chapters 11, 13, 14, and 17. 

F. F. Hill, in carrying out the policies of W. I. Meyers, his admin- 
istrative predecessor, felt that the Farm Credit Administration "ought 
to serve the credit needs of farmers" and "ought not to be used as a 
means of furthering other governmental programs." Secretary Wallace 
did not agree, and the Farm Credit Administration was placed in the 
U. S. Department of Agriculture. Hill and Wallace continued to disagree 
as to what ought to be. Hill was forced to resign in 1939, and A. G. 
Black was appointed to replace him. However, this agency was never 
really used as a means for carrying out the crop adjustment programs 
of the late 30' s and early 40' s largely as a result of the power pos- 
sessed by the major farm organizations to back up the value position of 
those favoring a more independent credit agency. Wallace's value sys- 
tem, given the distribution of political, bureaucratic, and lobby powers, 
was less workable than Hill's. Hill's system stood the pragmatic test. 24 



ment Problems in a Growing Economy, Heady, et al. (eds.), Iowa State University Press, 
Ames, Iowa, 1958. Some of the connections between pragmatism and institutionalism are 
found in J. R. Commons, Institutional Economics — Its Place in Political Economy, Macmillan 
& Co., Ltd., London, 1934, pp. 154-55 and 647. 

23 This contrasts with Boulding, op. cit., p. 12, who writes, "One of the most important 
propositions of this theory is that the value scales of any individual or organization are, 
perhaps [italics added] the most important single element determining the effect of the 
messages it receives on its image of the world." We would more than emphasize the 
"perhaps"; instead, we would probably omit the sentence. 

M M. R. Benedict, op. cit., pp. 392f. 



284 GLENN L. JOHNSON AND LEWIS K. ZERBY 

As indicated above, the Farm Security (later Farmers Home) Ad- 
ministration has encountered repeated problems of a value versus value 
nature. 25 The predecessor agency to the Farm Security Administration 
was the Resettlement Administration. It had grown up, in turn, out of 
the rural rehabilitation work of the Federal Emergency Relief Adminis- 
tration. This chain of agencies handled a whole series of problems de- 
fined by the dynamic, almost everchanging value and factual concepts 
held concerning rural poverty through the Great Depression, World War 
II, Korean, and postwar periods. Also, this chain of agencies has been 
experimental and has often been deeply involved in value systems which 
have failed to meet the criteria of consistency and clarity. 26 

The rehabilitation programs of these agencies have been criticized 
sharply for being too paternalistic, and for interfering with the freedom 
of individual farmers. Others have praised these programs for provid- 
ing low interest credit to those whose incomes were unacceptably low, 
along with enough supervision and managerial "know-how" to raise in- 
comes and insure repayment. Over the years, persons and agencies 
have come to attach less negative value to the increments of paternalism, 
subsidy, and restrictions on freedom in such credit programs, and have 
come to attach more positive value to increases in income and economic 
independence produced by such programs, while at the same time in- 
sisting that such programs be confined only to those needing substantial 
aid. It now appears that such programs will remain part of our govern- 
mental credit policy about as long as we have rural poverty arising from 
lack of control over enough resources to produce an acceptable standard 
of living. 

Other value conflicts encountered by this chain of agencies have been 
settled by complete or partial abandonment of the values they pursued. 
Agricultural fundamentalists and others attached great value to farms, 
farmers, and farm life. At first these values led to resettlement activ- 
ities designed to establish landless farmers and wage workers in perma- 
nent homes on the land. These efforts were often corporate, collective, 
and/or cooperative in nature. Soon, such resettlement became incon- 
sistent with such widely held values as efficiency (which called for the 
transfer of people out of agriculture), the desirability of technological 
advance, and the desire to keep up with rising nonfarm levels of living. 
This called for larger more productive farms instead of subsistence 
farms, the desire on the part of the individuals involved to own and con- 
trol their land and machinery, and a desire for freedom from group and 
governmental controls. With the passage of time, these competing 
values won out over the values attached to farms, farmers, and farm 
life as attainable through the Farm Security Administration resettlement 
activities. In 1946 the Farm Security Administration was replaced by 
the Farmers Home Administration which eliminated all community pro- 
jects. 



5 Ibid., pp. 356-64. 
l Ibid., p. 363. 



VALUES IN THE SOLUTION OF CREDIT PROBLEMS 285 

In the case of the resettlement activities, the desire for more free- 
dom to conduct individual affairs prevailed in conflict with some of the 
values included under agricultural fundamentalism and with other values. 
In the case of supervised subsidized credit for low-income farmers, 
this same desire for freedom to conduct individual affairs failed to pre- 
vail in competition with the value of income increments derivable from 
supervised and subsidized public credit. 

Examination of the two cases makes it clear that in both instances 
compromises among the "goods" and "bads" were involved in determin- 
ing the eventual course of action. Further, it is clear that it was not 
the totalities of freedom, all of the values of agricultural fundamentalism, 
or of all income which were balanced against each other. Instead, only 
the incremental changes involved in going from one course of action to 
another were weighed against each other. This balancing of incremental 
attainments and losses against each other in view of what is possible 
does not necessarily imply that the "goods" (ends, or what ought to be) 
against the "bads" (losses, or what ought not to be) are interdependent 
as argued by Dewey. To so argue would be the same as arguing that be- 
cause iso- value product and iso-cost lines jointly determine the maxi- 
mum profit point (which, incidentally, defines a "right" action) and es- 
tablish the marginal value productivities at that point as the relevant 
values, the iso- value product lines (the structure of goods) are dependent 
on the iso-cost lines (the structure of bads or means). Alfred Marshall 
saw this much more clearly than John Dewey. 27 



Social Scientists Have Played Major Roles in Studying Values 
as a Basis for Right Actions 

The list of trained agricultural economists who have dealt with the 
values involved in credit problems is long and respectable. Of the seven 
Farm Credit Administration Governors to date, at least six are or were 
primarily agricultural economists. The list includes W. I. Meyers, F. 
F. Hill, A. G. Black, C. R. Arnold, I. W. Duggan, and R. B. Tootell, the 
present governor. Besides providing these governors, the agricultural 
economics profession has provided subordinate administrators, research 
workers, and appraisers to the Farm Credit Administration and other 
governmental credit agencies. 

When one considers private agencies providing credit services to 
agriculture, the discipline is as well represented, e.g., the president of 
the Bank of America is an agricultural economist. Other agricultural 
economists serve in responsible positions in private credit institutions. 
Several agricultural economics departments regularly sponsor banker 
clinics with the express purpose of helping private banks service, and 
recognize opportunities for servicing, farmers. The Agricultural 



^Compare, for instance, John Dewey, "The continuum of ends-means," Ethical Theories, 
A. I. Melden (ed.), Prentice-Hall, Inc., New York, 1950, pp. 360f, with Alfred Marshall, 
Principles of Economics, 8th ed., Macmillan & Co., Ltd., London, p. 348. 



286 GLENN L. JOHNSON AND LEWIS K. ZERBY 

Commission of the American Banker's Association has five advisors, at 
least four of whom are academic agricultural economists or farm man- 
agement men. 28 Within the Federal Reserve system, most if not all of 
the district banks have competent agricultural economists on their staffs. 
Still further, agricultural economists from land- grant colleges and pri- 
vate universities serve as consultants to both private and public credit 
institutions. Members of Congress contemplating new farm credit leg- 
islation have been served repeatedly by agricultural economists from 
both state and privately endowed universities and colleges. 

It is instructive to look at the Journal of Farm Economics for the 
1931-36 period when credit problems were numerous and our credit in- 
stitutions were in a state of flux. In this six- year period, 29 articles on 
farm credit, debts, mortgages, and related matters appeared in the 
Journal. Since the volumes were smaller in those days than the 1958 
proceedings issue, a substantial proportion of the Journal's space was 
devoted to agricultural credit problems. These articles included (1) re- 
ports on the operation of the Federal Intermediate Credit Banks, the 
Federal Land Banks, and the Agricultural Credit Corporation; and (2) 
empirical information on mortgage debt, foreclosures, and farm debt 
adjustment. 

In this period the writings of agricultural economists aided in the 
administration of the credit programs. In these articles, little attention 
was given to the restrictions of positivism, non- Par eto- better adjust- 
ments were not avoided, and the lack of interpersonally valid welfare 
measures were not mentioned. Agricultural economists were too busy 
amassing facts, developing value concepts, defining problems, ascer- 
taining "right" actions, and executing those actions to let such restric- 
tions limit their range of attack on the major credit issues of their 
day. 29 



Relatively Few "Explosive" Situations Have Arisen in Connection 
With the Work of Agricultural Economists on Values 

While it is accurate to state that relatively few "explosive" situations 
have developed around agricultural economists working with the value 
aspects of credit problems, tensions and conflict have often been high in 
connection with operations of the FSA (FHA now), REA, and when the 
purposes of FCA have been questioned. In a few instances agricultural 
economists have "stood up to be counted" and then were beaten on value 
questions. The F. F. Hill- Wallace disagreement is a case in point. 
However, the history is mainly one of farm leaders, legislators, admin- 
istrators (many of whom were agricultural economists), legal advisors, 
and agricultural economists doing an immense amount of homework on 



28 Agricultural Commission, Intermediate-Term Bank Credit for Farmers, 12 East 36 
Street, New York 16, N. Y., inside front cover. 

29 The actions of these early fruitful workers' time were inconsistent with the positivistic 
restrictions present-day agricultural economists often impose on themselves. 



VALUES IN THE SOLUTION OF CREDIT PROBLEMS 287 

fact and value concepts as a basis for right actions. The evidence in 
recorded history is that these often succeeded in developing value and 
fact concepts which were consistent and understandable. In those in- 
stances in which value tensions and conflicts did build up to critical 
levels, there is evidence of inconsistent value or belief structures, vague 
value and factual concepts, unacceptable values, or inaccurate factual 
beliefs. In many instances, this inconsistency, vagueness, and inappli- 
cability was worked out before strong positions were developed. After 
these difficulties were eliminated, the strong positions which were de- 
veloped usually led to solutions which have produced acceptable (right) 
actions rather than to explosions. 



A High Proportion of the Policy Decisions Reached on Credit 

Problems Have Been Satisfactory and Have Met the Criteria 

of Rationality (Logic, Clarity, and Applicability) 

This symposium, with its purposes of defining credit problems and 
outlining research work (cf. Chapter 27), should not prevent one from 
recognizing that past work on credit problems has been good in the sense 
that applicable, understandable, and moderately consistent actions have 
been recommended and adopted. The solutions have been effective in 
that they have been expressed in terms of institutional arrangements 
which have, in turn, accomplished what public decision- making units 
have intended to accomplish. This record of success cannot be ignored 
by those of us who face the farm credit and capital problems of Amer- 
ican agriculture in the 60's (cf. Parts I and II). As the general proce- 
dures followed in the past have accomplished results which speak well 
for the procedures, they are worth summarizing. 

General Procedures Followed in the Past: 

1. Both factual and normative belief structures have been studied and devel- 
oped by those persons (including agricultural economists) working on credit poli- 
cies and programs for American agriculture. 

2. Right actions have been ascertained as a compromise among the "goods" 
and "bads" within value structures in view of what was possible as revealed by 
factual beliefs about the nature of present and future reality. 

3. Workers seem to have been able to avoid what Bentham feared when he 
wrote that attempts to work with values consist "in so many contrivances for 
avoiding the obligation of appealing to any external standard, and for prevailing 
upon" another to accept one's "sentiment or opinion as a reason in itself." 

4. On many occasions, workers have had grave doubts about the reliability of 
their beliefs concerning the nature of present and future reality. Similarly, doubts 
appear to have been present concerning the clearness and consistency of value 
structures or normative beliefs. These doubts have led to humility on the part of 
legislators, administrators, and researchers; a humility which has led, in turn, 

to flexibility of opinion concerning the Tightness or wrongness of different possible 
actions. There has been a willingness to experiment, re-examine, and reformu- 
late. This flexibility and willingness (this recognition of a human tendency to err 



288 GLENN L. JOHNSON AND LEWIS K. ZERBY 

with respect to both factual and value beliefs) has probably prevented individuals 
from taking positions not changeable except by socio-politic explosion. 

5. Workers from the social science disciplines, particularly agricultural 
economics, have participated in all of the above-described procedures rather than 
confining their activities to particular areas such as those prescribed by (a) posi- 
tivism, (b) conditional normativism (including modern welfare economics), and 
(c) "pure" normativism. There is little evidence that those who worked with val- 
ues have suffered more professionally, or have been less productive, than those 
who have avoided the study of values. Rather, the reverse seems to be true. 

6. Non-Pareto-better adjustments have been agreed upon and carried out 
repeatedly. 30 

7. Despite the difficulties encountered by many in conceiving of a "least com- 
mon denominator of ability to attain more basic values which is neutral with re- 
spect to those more basic values," choices have been made repeatedly among 
alternative courses of action involving such divergent values as income, security, 
freedom from government control, equality of property ownership, equality in 
access to credit, and the rights of private property. 

8. Increments and decrements in the degree to which valued situations are or 
would be attained have been frequently considered; complete attainment or aban- 
donment of a value or set of values has seldom occurred. 

9. Public actions have been determined by a rough sort of maximizing of the 
difference between "goods" and "bads," or of the ratio between "goods" and "bads." 
Thus, these actions would tend to be "right" as the term is used herein. This 
meaning of right is consistent with what the economist generally means by efficient 
so long as the concept of efficiency is left general and not restricted to mean the 
maximization of utility in the Benthamic sense. 

SUGGESTED PROCEDURES IN STUDYING CREDIT PROBLEMS 

The analysis of values and the historical situations which have been 
examined suggest several methodological procedures. 

1. In defining problems and making policy decisions about farm 
credit, it is important to recognize that two broad kinds of knowledge 
are important. Not only is it necessary to have factual beliefs of the 
sort gained by historical, economic, and sociological investigations, but 
it is also important to have knowledge of the personal and social values 
involved in the decision. 

2. In acquiring this latter sort of knowledge, one cannot necessarily 
assume that decision- makers (legislators, administrators, voters, and 
customers) are aware of even their own personal values, not to mention 
less personal values which may be involved. Decisions are more likely 
to be right if based on carefully developed logical and clear values than 
on what people conceive the important interests to be in the early stages 
of problem perception and solution. In other words, the policy- maker 
must not assume that a description of initial values is a description of 

a generally acceptable value structure. The latter would be those values 
the people would express if they were in a position to know the sets of 
consistent and clear value concepts involved in a set of contemplated 



30 An interesting connection between Kant's categorical imperative and modern welfare 
economics is pointed out by G. I. Trant, "Ethical systems and agricultural policy," Canad. 
Jour. Agr. Econ., Vol. 7, 1959, pp. 75f. 



VALUES IN THE SOLUTION OF CREDIT PROBLEMS 289 

social actions. Just as lawyers are consulted to determine legal inter- 
ests because they know, and laymen do not know, the law which defines 
these interests, so is the organized research of economists, sociologists, 
and others needed to help develop value concepts. 

3. It is recommended that the criteria of logical consistency and 
under standability (clarity) be used as criteria in formulating value, as 
well as factual, beliefs. 

4. Just as it was recommended that logical consistency and under- 
standability be used as criteria in formulating value and factual beliefs, 
so it is recommended that workability and efficiency be used as criteria 
in selecting "right" actions. 

5. There is a need within the social disciplines for collaboration 
with philosophers whose chief concern is the meaning of crucial terms, 
as well as with those whose chief concern is empirical hypotheses and 
laws. Any branch of knowledge, theoretical or practical, can advance 
only as far as its basic concepts allow it to advance. One wonders 
whether, for example, agricultural fundamentalists always have a clear 
understanding of the nature of the value system they advocate. Often 
one has the impression that the high value given to the family farm is 
unrealistic in view of the facts, and that a clearer understanding of the 
actual value of such an institution would change their point of view. 

6. In attempting to understand problems of credit as they relate to 
farmers, it is important to consider the historical, economic, sociolog- 
ical, and moral contexts within which these problems occur. Much is to 
be said for very close participation in the work of the decision- making 
units encountering the problems. Though such participation is some- 
times regarded as interfering with objectivity, it must also be recognized 
that such participation may be the only source of experience with the 
complex, interrelated values involved in many problems. 

7. While we have been unable to reject any commonly advocated ap- 
proach to the study of facts and values as having been useless in the 
solution of credit problems, we have also been unable to find any single 
approach capable of accomplishing all that the others have accomplished. 31 

8. In determining right actions on the basis of (a) the * goods n and 
"bads" involved in a problem and (b) what is possible, it is recommended 
that the maximizing procedure of economists be used extensively. Right 
actions and efficiency are very closely related concepts. 

9. In using the maximizing procedures of economists, it is recom- 
mended that no distinctions be attempted between economic and noneco- 
nomic values, or between economic and noneconomic efficiency, or be- 
tween economic and noneconomic "right actions. " 32 

10. It is a mistake to omit the pragmatic (workability) dimension 



31 F. H. Knight, On the History and Method of Economics, The University of Chicago 
Press, Chicago, 111., 1956. 

32 Glenn Johnson and Joel Smith, "Social costs of agricultural adjustment —with particular 
emphasis on labor mobility," Problems and Policies of American Agriculture, Iowa State 
University Press, Ames, Iowa, 1959, p. 259. 



290 GLENN L. JOHNSON AND LEWIS K. ZERBY 

when formulating credit policies. No matter how clearly understood or 
how factually wise and normatively adequate policies may be, if they do 
not actually solve the problems for which they were created, they are of 
no value. 

11. Because of the high probability of developing false beliefs (both 
factual and normative), humility is in order with respect to both value 
and factual concepts developed in the study of credit problems. Humil- 
ity is demanded by the values of science, most religions, and of society 
in general, and is generally an imperative. 



Chapter 20 



JOE M. BOHLEN 
GEORGE M. BEAL 

Iowa State University 



Sociological and Social 
Psychological Factors 



CREDIT IS USED in the nonagricultural business world as an in- 
tegral part of the over-all business operation. Business people, 
in general, consider credit as another economic resource avail- 
able to them in the routine operation of their business affairs. There 
is some evidence, however, that this generalization does not necessar- 
ily apply to farmers as a group to the same degree that it does to busi- 
nessmen. 

Some of the factors which influence farmers to think differently 
about credit are examined in this chapter. In addition, some research 
evidence will be presented about how farm people think and feel about 
credit and the use of credit in purchasing goods and services. 

Economists frequently refer to some of the factors limiting credit 
use within the dichotomous framework of internal and external capital 
rationing (e.g., Chapters 1, 2, 7, and especially the discussion by Coutu 
and Lindsey in Chapter 21). Some of the sociological and social psy- 
chological factors related to internal capital rationing will be examined 
below. Internal capital rationing involves self-imposed limitations on 
capital and credit use on the part of the person involved. It is the con- 
tention here that to understand the phenomenon of internal capital ra- 
tioning, one must have some insight into the "self * which is involved in 
the imposition of these limits on capital and credit use. 

In order to present the data relating to personality structure which 
may affect credit and capital use, a previously developed framework is 
used which has general application wherever individual action and 
decision-making is under analysis. 1 Throughout this paper certain con- 
cepts and definitions will be used that may vary slightly from the way 
in which they are used in economic writings. These terms are defined 
below; 

A concept is a semantic symbolization of the relationship which is purported 
to exist between any two or more given phenomena. 

A belief is a subjective interpretation of a concept. 

A value is a subjective interpretation of the relationship which ought to exist 
between phenomena. Sometimes values are referred to as normative beliefs. 



1 Instructor's Guide: Communication Training Program, Unit 1 — Basic Communication, 
Section 3, The Group Process. Developed by the National Project in Agricultural Communi- 
cations from an original manuscript prepared by Joe M. Bohlen and George M. Beal. Copy- 
righted 1956 by the American Association of Land- Grant Colleges and State Universities. 

291 



292 JOE M. BOHLEN AND GEORGE M. BEAL 

An attitude is an individual's tendency to act based upon his beliefs and values. 

A goal is a future relationship which an individual wishes to establish between 
himself and certain selected phenomena. 

Means are courses of actions which may be taken to achieve goals. 

Reality is that part of the relationships which exist between phenomena that 
are similarly perceived by different individuals in different places and/or at dif- 
ferent times. For a given individual, the interpretation of the relationship between 
phenomena is a composite of reality and beliefs. If a person believes a relation- 
ship to exist between phenomena, insofar as his subsequent behavior is concerned, 
it does exist (cf. Johnson and Zerby's approach in Chapter 21). It is because of the 
truistic nature of this statement that it becomes necessary to understand the proc- 
ess of how man thinks, if his use of credit is to be fully understood. 



MAN, THE THINKING BEING 2 

Man is born into the world with certain potentialities which have 
been biologically determined (intelligence parameter, physical size, 
resistance or susceptibility to certain bodily ills, etc.). He is also 
born with a predisposition to act, or to sustain physical movement. 
Because of the unique nature of his intelligence, he is inclined to place 
all the phenomena which he perceives into patterns of meaningful in- 
terrelationships. Man is an organizing being. He organizes the world 
around him into patterns of cause and effect which to him are rational. 
In many instances he does this without taking into consideration all of 
the data that are known or are possible to know. Hence, he sometimes 
assigns relationships to phenomena which are spurious, from the point 
of view of scientific fact. 

Man is able to go through the process of perceiving interrelation- 
ships because he has the ability to deal with abstractions. He can cre- 
ate symbols in his mind which have empirical referents in the universe 
about him. This frees him of the necessity of being in immediate sen- 
sory contact with phenomena in order to respond to them or act in re- 
lationship to them — a faculty unique to man. 

Because man has this ability to deal with abstractions and communi- 
cate via exchange of symbols with meanings, he has another uniqueness. 
Man is the only form of life which is faced with the necessity of making 
a distinction between those things which are real and those which are 
possible. All of the life forms below him must have sensory experi- 
ence with "real" things in order to respond to them. There is no in- 
tellectually perceived future for any life form which cannot use symbols 
in its mental operation. Possibilities are always in the frame of ref- 
erence to the future. Since all life forms except man respond directly 
to stimuli, their behavior is much more easily predicted than that of 



2 For further elaboration of the ideas presented in this section, see Ashley Montagu, 
Human Heredity, The World Publishing Co., Cleveland, Ohio, 1959; George H. Mead, Mind, 
Self, and Society, University of Chicago Press, Chicago, 111., 1947; John Dewey, Human 
Nature and Conduct, Holt, Rinehart & Winston, Inc., New York, 1922; Ernst Cassirer, An 
Essay on Man, Yale University Press, New Haven, Conn., 1944. 



SOCIOLOGICAL AND SOCIAL PSYCHOLOGICAL FACTORS 293 

man. They respond in what is called the simple reflex arc, i.e., a di- 
rect response to a stimulus. 

Man never responds to a stimulus per se. Whenever a human being 
is faced with a stimulus or problem, he responds not to it, but to the 
interpretation which he places upon it. He deals not only with the re- 
alities of the situation, but with the possibilities of it. Since he can 
deal in symbols, he can project himself into the future and mentally 
create alternative courses of action which he can evaluate and then 
make choices from this evaluation. 



The Unit Act 

In order to discuss the above more concretely, it is necessary to 
move to the lowest common denominator of human behavior, that whidh 
will be operationally called "The Unit Act. " The unit act consists of 
(1) the receipt of a stimulus, (2) the interpretation of this stimulus and 
the circumstances under which it was received, and (3) a response or 
an action. In contrast to the simple reflex arc described above, man 
thinks in terms of a stimulus which leads to interpretation and then re- 
sults in a response. The response may be to do nothing, or not to act 
overtly in relation to the stimulus. This is an act in itself. 

Before man responds to any stimulus toward which he has not de- 
veloped a habituated pattern of behavior, he weighs alternative goal 
choices in terms of the kind of outcome he prefers, and selects a means 
for attaining the choice he makes. This is referred to here as a part 
of the interpretation process. 

A more detailed discussion of the unit act is appropriate at this 
point. Whenever man receives a stimulus, he looks into his past expe- 
riences and asks himself what similar stimuli he has received or what 
similar problems he has encountered. In fact, it is doubtful that man 
will receive the stimulus unless he has had past experience with it, or 
a similar experience. Next, he asks himself how he had responded or 
acted in relation to these similar stimuli when he had encountered them 
in the past. This would apply to both ends and means. He recalls his 
evaluation of his actions, and whether he was satisfied or dissatisfied 
with the outcome of his actions. 

Man relates his past to the future by asking himself if he wants the 
same outcomes or goals now as he did when he responded to the similar 
stimuli in the past. If not, what different goal(s) does he want to attain 
or consider? He projects to the future to determine if the same alter- 
native means that were open to him in the past are still available. Are 
there more efficacious means now available? Only after he has con- 
sidered his relevant past experiences and his projections of the future 
does he choose an alternative (end and mean) which best suits his 
values. 



294 JOE M. BOHLEN AND GEORGE M. BEAL 

Role of Stimuli 

The personality of man is molded by the series of events which are 
a part of his experience world. When he receives a similar stimulus 
repeatedly and each time responds in a similar manner which gives 
him satisfaction, the interpretation moves from the intricate level dis- 
cussed above to a cursory recognition that the stimulus is a familiar 
one. When this takes place, an individual has formed a "habit" — a 
convention by which he copes with relatively similar and familiar 
stimuli with a minimum of intellectual effort. This allows an individual 
to do many routine things very quickly, and to utilize time for inter- 
pretation of new or relatively unique stimuli. When an individual de- 
velops a habitual way of dealing with a recurrent stimulus or pattern of 
stimuli, he frequently neglects to note that at each recurrence the 
stimulus and/or circumstances surrounding it have changed slightly so 
that over a period of time he is responding to a stimulus pattern that 
has been so altered from the original that his habituated response is 
completely nonrational. 

Because man can deal with symbols which have empirical referents 
without being within sensory proximity of these referents, his experi- 
ence world consists of not only those experiences in which he was an 
active participant, but also the experiences of other men which took 
place at other times and in other places. To the scholar who makes 
the most of this, the accrued experiences of all civilized mankind are 
available for use in making decisions. Since most of these accrued 
learnings are in the form of the written word, the semi-literate or il- 
literate have available to them only those experiences in which they 
have personally participated or of which they have heard. 

However, each man builds up his experience world and makes judg- 
ments about each of these experiences as he has them. He evaluates 
them in terms of the relative satisfactions gained. He judges them to 
be good, bad, or indifferent. The patterning of these judgments about 
past experiences forms what is known as an individuals value system. 
The individual's value system provides him with a set of tendencies to 
act in relation to stimuli which he receives. These tendencies to act 
are commonly referred to as attitudes. Since man is not a Univac, he 
often holds conflicting attitudes without any seriously deleterious men- 
tal consequences. In many cases man segments his attitude structure 
— he acts rationally within a given segment of his attitude structure, 
but the action may be in competition or conflict with another segment 
of his attitude structure. In some cases man has a poorly integrated 
total attitude structure. As man receives a stimulus and contemplates 
his response to it, he takes into consideration both the ends or out- 
comes which he most favors and the means or methods of attainment 
which are most acceptable to him. 

Part of man's value system is the tendency to organize both ends 
and means into more or less organized hierarchies on the basis of fa- 
vorableness and acceptability to himself as an individual. He may 



SOCIOLOGICAL AND SOCIAL PSYCHOLOGICAL FACTORS 295 

place these in juxtaposition when making his choices of alternatives. 
In this process, a lower level or less favorable goal may be selected 
because the means of attaining the more favorable goal was too unsat- 
isfactory to accept. When a given goal exists with alternative means of 
attaining it, man inevitably (unless he is mentally ill) chooses the 
means which he considers most satisfactory for himself. But, of 
course, the amount of knowledge, as well as values and attitudes, will 
determine even the alternatives considered in making decisions. 

At any point in time when an individual who is farming faces the 
problem of attaining a certain economic goal, he must (because he is a 
human being) go through the processes described above. When he con- 
siders or interprets the situation, he brings to bear his value system 
and the resultant attitudes he has toward credit use —frequently referred 
to by him as "going in debt" (which is an insight in itself) — and all of 
the past experiences he has had with credit use. The experiences 
which are known through active personal involvement or by vicarious 
means may be very limited, but limited or not, these provide the 
framework out of which the farm manager projects the alternatives 
which are considered to be available to him (cf. Chapters 14 and 21 for 
application to economic situations). 



Values and Attitudes 

Within this basic context of how man thinks, there are many spe- 
cific concepts from the fields of sociology and social psychology that 
are of value in better understanding how man forms and acts in rela- 
tion to his value system. Several concepts are presented here for il- 
lustration of this point. 3 

Attitudes flow from a value system which is built up from accretion 
of judgments made about past experiences. Man's world tends to be- 
come meaningful and organized in part through repetition of experi- 
ences with the same outcomes. After similar experiences with the 
same concept again and again, the individual comes to expect the same 
results. He perceives those parts of present experiences that resemble 
the past. This is known as selective perception . This often leads to 
canalization. The range of potential actions that are perceived to be 
satisfactory becomes more and more narrow. It is found in advertis- 
ing research that individuals are far more amenable to having their 
existing needs implemented than they are to developing entirely new 
needs. Advertising (and education?) is typically directed toward the 
canalizing of preexisting behavior patterns or attitudes. 

The first perceptual contact and reaction to a new stimulus (pri- 
macy) is often deeply embedded in the value structure — in a sense it is 



3 For additional clarification of the concepts, see Eugene H. Hartley and Ruth E. Hartley, 
Fundamentals of Social Psychology, Alfred A. Knopf, Inc., New York, 1955, pp. 233-49; 
Wilbur Schramm, Process and Effects of Mass Communication, University of Illinois Press, 
Urbana, 111., 1955, pp. 289-320. 



296 JOE M. BOHLEN AND GEORGE M. BEAL 

integrated into the value structure, and once there, must be "dislodged" 
if a change is brought about in attitude. The recency of experience 
seems to be important, since there appears to be less distortion in re- 
call of the experience and the judgment made of the experience if the 
experience were recent. Another factor that is important in embedding 
an experience in the value structure is the intensity of the experience. 
Thus, an experience dealing with credit that is perceived as a crisis 
with much emotional involvement may lead to an embedding of an atti- 
tude toward credit that will be difficult to change. Another social- 
psychological concept that may have importance in the study of atti- 
tudes toward farm use of credit is "transfer." It has been found that a 
given response originally aroused by one stimulus can in time be 
aroused by a large number of other stimuli which may bear little re- 
semblance to the original stimulus, but which are connected to it by 
association in time or space, or in some other way in the individual's 
experience field. Thus, one early bad experience with a particular bor- 
rowing of money can be transferred to all forms of credit by associa- 
tion. 

Any given attitude held by an individual has four major dimensions: 4 

Direction — for or against, positive or negative, support or rejec- 
tion of a given concept or stimulus — person, group, process, institu- 
tion, issue, etc. 

Degree — variation in direction; for example, very favorable, fa- 
vorable, about 50-50, unfavorable, very unfavorable. 

Intensity — degree of conviction with which an attitude is held. 

Salience — position of specific attitude within individual's constella- 
tion or structure of attitudes — central, core, basic, or peripheral. 

Man acts partially in terms of his referents and reference groups . 
These are the groups with whose norms he believes he should comply 
(usually groups of which he is a member) or those with whom he com- 
pares himself. Thus, in making decisions regarding credit he may ask 
himself if this type of credit or amount of credit is within the expecta- 
tion of the group for its members. Or, if he aspires to be "like" or be 
accepted as a member of a given reference group, he asks himself if a 
given type of credit behavior is acceptable in those groups. Likewise, 
man thinks in terms of individual referents. A given farmer may not 
seek a given type of credit from an important referent, e.g., a banker, 
because of his perception of a negative attitude by the banker. In this 
case, the banker is a significant other to him. The broad framework of 
how man thinks and acts, as well as the specific concepts, some of 
which were given above, appears to be a valuable analytical tool in 
studying the nature of credit use by farmers. The major problem is 
setting up general theory models and workable concepts for empirical 
hypothesis testing. The above given framework and sociological and 
social- psychological concepts have been of great value in attitudinal 
research. Since very little of this type of research by the authors has 



4 Additional discussion may be found in Hartley and Hartley, op. cit., pp. 665-74. 



SOCIOLOGICAL AND SOCIAL PSYCHOLOGICAL FACTORS 297 

dealt with credit per se, most of the concepts are not directly applied 
to the use of credit in this chapter. However, a number of findings that 
may be logically related to credit use by farmers are presented below. 
In addition, selected findings from studies related to credit use con- 
ducted by other research workers are utilized in the following discus- 
sion. 

One of the problems in doing research in the area of values and 
attitudes is stating precisely the level of the attitudes being measured. 
In Chapter 19, Johnson and Zerby present their definitions of instru- 
mental values (a concept of what ought to be, where the "ought" is de- 
rived from a more basic value) and basic values (a more basic value 
for which instrumental values are actualized). 

It is not inconsistent with this conceptualization to speak of values 
on a continuum from general to specific. For instance, farmers' atti- 
tudes toward the role of science in farming may be conceptualized as 
being at an intermediate level of generality. Below this level of gener- 
ality one might expect to find many more specific values and attitudes 
toward the use of science in specific aspects of farming. The farmer 
who has a high-level orientation toward science in farming might be 
expected to believe that the use of scientific information and methods 
in farming is a necessity. This type of farmer would be rational in his 
decision-making process, i.e., seeking out all available scientific in- 
formation, considering all alternative available inputs. He would be 
more ends oriented than means oriented. One might infer that this 
type of farmer would most likely consider the optimum use of credit as 
a means to an end. 

The Iowa State University rural sociology team has developed a 
scale that attempts to measure this attitudinal pattern orientation toward 
the use of science in agriculture. Starting with 42 items, this scale has 
been reduced to 6 items with a Guttman coefficient of reproducibility of 
0.91. 

The attitude toward scientific agriculture correlates significantly 
with such items as: education, farm size, extra-locality orientation, 
categories of agricultural chemicals used, agricultural chemical ex- 
penditures, expenditures for fertilizer, perceived importance of ferti- 
lizer to farm income, fertilizer knowledge and risk preference (will- 
ingness to take risk). Limited analysis indicates that a number of 
specific attitudes and actions can be at least partially predicted by this 
general attitudinal pattern toward the importance of science in agricul- 
ture. 

As the farmer faces the problem of making and carrying out deci- 
sions, he is confronted with risk and uncertainty. He has a general at- 
titude toward risk-taking. Within this general attitude framework, the 
farmer has specific attitudes toward certain ends and means available 
to him, including attitudes toward credit. 

A 10-item risk preference scale has been developed and used in 
field research. The most negative attitude toward risk would have 
scored 10, and the most positive attitude would have scored 50. The 



298 JOE M. BOHLEN AND GEORGE M. BEAL 

scores actually ranged from 16 to 41, with an average for the Iowa 
statewide sample amounting to 27.2. The greatest concentration of 
scores was near the lowest end of the scale, viz., greatest aversion to 
risk. 

The research worker is faced with a dilemma when he attempts to 
impute causality to relationships found between risk-taking and credit 
use, and other factors. Certain variables are found to be significantly 
related and have predictive qualities. There may be logically hypothe- 
sized causal relationships. Cause and effect are difficult to establish 
quantitatively. However, from the point of view of action orientation, 
certain cause and effect relationships are often assumed and, in fact, 
must be assumed in information and education programs. It often ap- 
pears that changing one variable often brings about a change in another 
variable. Because of the great number of intervening and related vari- 
ables that may be involved in the change process, it is often difficult or 
impossible to attach direct causality or at best to determine the actual 
degree of causality of a single variable. However, a number of signifi- 
cant relationships are found between risk preference and other varia- 
bles. 

The size of the farm operation, as measured by number of crop 
acres, has a significant positive relationship to risk preference (will- 
ingness to take risk as measured by the risk preference scale). It is 
difficult to construct a logic of causality between these two variables. 
It may be hypothesized indirectly that the farmer has a larger number 
of crop acres because he has been willing to take some risks. Con- 
versely, it might be hypothesized that the larger equity in the form of 
land makes it more tenable for him to take risks because he has a 
larger equity from which to operate. There may well be an interaction 
between these variables. A similar argument may be made in relation 
to the highly significant positive relationship between gross income and 
risk preference. A significant difference of risk preference is also 
found among renters, renter-owners, and owners. Renters have a 
higher risk preference score. 



Risk Preference and Other Attitudinal Variables 

There are significant interrelationships between risk preference 
and other attitudinal variables. There is a significant positive rela- 
tionship between willingness to take risks and the attitudes of farmers 
toward the importance of science and modern technology in present-day 
farming. There are also significant positive relationships between risk 
preference and how important a farmer thinks the use of fertilizer and 
other agricultural chemicals is in achieving a desired level of farm in- 
come. 

Other inferences can be drawn from the highly positive significant 
relationships between positive attitudes toward taking risks and the 
actual expenditures for fertilizer and agricultural chemicals. The fact 



SOCIOLOGICAL AND SOCIAL PSYCHOLOGICAL FACTORS 299 

that farmers have a "self image" of themselves in relation to other 
farmers as far as willingness to take risks is shown by an individual 
item analysis. The following is one of the items in the scale, and re- 
sponses made to it: 

I regard myself as the kind of person who is willing to take a few 
more risks than the average farmer. 



Strongly agree 


5% 


Agree 


33% 


Undecided 


12% 


Disagree 


47% 


Strongly disagree 


3% 



The majority of those who gave direct answers (either agree or 
disagree) believed they were less willing to take risks than the average 
farmer. It may be hypothesized that these answers represent the ef- 
fect of reference groups on credit use. 

Insight may be gained into attitudes toward risk by the answers ob- 
tained to the following statement: 

A reliable criticism of many farmers these days is that they have 
forgotten how to play it safe. 



Strongly agree 


5% 


Agree 


50% 


Undecided 


12% 


Disagree 


31% 


Strongly disagree 


2% 



This question allowed each respondent to set his own framework of 
what it means to "play it safe." It may be noted that the majority of 
farmers (55 percent) agreed that many farmers have forgotten how to 
play it safe. On the other hand, 33 percent disagreed with the state- 
ment. The remaining 12 percent were undecided. Thus, one might infer 
that there are a majority of farmers who think many farmers of today 
are too willing to take risks, viz., a negative attitude toward taking 
risks. An additional measure was attempted on the perception of how 
far farmers must sometimes go in taking risks. 

The statement: If a farmer is to get ahead in life, sometimes he 
must be willing to gamble on all or nothing at all. 

Strongly agree 6% 

Agree 30% 

Undecided 7% 

Disagree 44% 

Strongly disagree 13% 

That new modern technology is perceived as being an important risk 
and uncertainty factor in present-day farming is indicated in the follow- 
ing data: 



300 JOE M. BOHLEN AND GEORGE M. BEAL 



There is a large amount of risk or uncertainty that goes along with 
the results from the use of any new farming technique. 

Strongly agree 6%' 

Agree 64% 

Undecided 7% 

Disagree 22% 

Strongly disagree 1% 

Since use of credit involves either a risk or an uncertainty, depend- 
ing upon the type of use and level of knowledge of the individual, an ex- 
amination of farmers* attitudes toward risk-taking may provide some 
insight regarding the existing use patterns. A study of a group of 120 
farmers in south central Iowa revealed that 70 percent of the respond- 
ents had an aversion to risk-taking as indicated by their responses to a 
hypothetical situation. 5 

The respondents were asked, "If you had the choice of making 
$1,000 now or the possibility of making either $500 or $1,500 in the 
future, which choice would you take?" Over 70 percent chose the 
$1,000. There were highly significant relationships between the choices 
and the respondents * knowledge of fertilizer and fertilizer use, as well 
as the amounts of fertilizer used. Those who "played it safe" knew less 
and used less. In another phase of this TVA cooperative research 
study, the results of data secured from a sample of 315 farmers indi- 
cated that willingness to take risks was positively correlated to their 
attitudes toward scientific agriculture, their attitudes toward the im- 
portance of fertilizer use, and their attitudes toward the risks involved 
in farming. Also, their willingness to take risks was related to 
amounts and expenditures for both fertilizer and agricultural chemi- 
cals. 

A second item regarding credit was also included in this study: 

A farmer can borrow $500 to purchase a new piece of farm 
equipment that can make him an average profit within the year; 
he should borrow the money. 

Strongly agree 10% 

Agree 72% 

Undecided 11% 

Disagree 6% 

Strongly disagree 1% 

Within a farmer's general attitude pattern toward risk-taking, he 
has an attitude toward credit, and even more specifically, differential 
attitudes toward credit for different purposes. The fact that there may 
be a favorable attitude toward credit for farm machinery is suggested 



5 Joe M. Bohlen, George M. Beal, and Larry Campbell, Analysis of Some Characteristics 
of Individuals Using Soil Testing as the Result of a Promotional Program, Rural Sociology 
Report No. 9, Aug., 1959. Cooperative project with Tennessee Valley Authority, ISU Agr. 
Exp. Sta. Project 1352. This research was conducted under TVA Project Authorization 1096. 



SOCIOLOGICAL AND SOCIAL PSYCHOLOGICAL FACTORS 301 

in the above findings. Bivens found that 25 percent of a central Iowa 
sample of farmers who were using production credit were using credit 
for farm machinery and equipment. 6 Venezian found that those farmers 
who had a high willingness to assume risk (willingness is based on 
scores from a scale which had been developed to indicate high, medium, 
and low willingness to assume risk) were the ones who actually had the 
most credit outstanding. 7 

Bivens also found that the general attitudes toward debt contained a 
high degree of risk aversion. He used a series of statements to which 
his respondents could react on a 5-point continuum ranging from defi- 
nitely agreeing to definitely disagreeing with the statements. Some of 
the basic values which provide the background of the attitudes toward 
credit are obvious in the range of replies to these statements. One 
statement was, "It is desirable for every farm family to get out of debt 
as soon as possible. " Almost 90 percent of the respondents "definitely 
agreed" with the statement, and another 9 percent "agreed somewhat" 
with it. Only 1 percent "disagreed somewhat" with it. This type of re- 
sponse implies a basic fear of being in debt which may limit an eco- 
nomical use of credit as a management resource. 

Previous work by the authors and others has indicated that there is 
a significant negative relationship between high value on land owner- 
ship and willingness to take risks of another type, i.e., adoption of new 
farm practices. Bivens found that there were strong attitudes toward 
land ownership in his sample of farmers. This finding is consistent 
with practically every other research study that has attempted to 
measure this attitude. 8 

Some of the data, as yet unpublished, from the research project 
used by Venezian for his thesis provide further insight into this atti- 
tudinal structure. 9 One of the statements to which the respondents 
could react as stated above was, "Farm families would do well to wait 
until they have accumulated their own money rather than borrow money 
for farm production purposes." 

As pointed out earlier in this chapter, individuals consider the ends 
and choose the means in relation to themselves. The evidence in the 
area of credit and credit use supports the hypothesis that if an end is 
desirable enough, an individual will use a means which may be disliked 
to attain it. Thus, the type of goal which would be accomplished by the 
use of credit might temper its use* In Venezian's study, an effort was 
made to get a ranking of farmers' goals. He found that the most fre- 
quently mentioned goals of farm people were closely oriented to the 
farm itself, and to security. 10 



6 Gordon E. Bivens, "From household interdependence and other factors in relation to 
use of credit by farm families in Greene County, Iowa." Unpublished Ph.D. thesis, Iowa 
State University, Ames, Iowa, 1957. 

7 Eduardo L. Venezian, "Use of production credit by farm families." Unpublished M.S. 
thesis, Iowa State University, Ames, Iowa, 1959. 

8 Bivens, op. cit. 

9 ISU Agr. Exp. Sta. Project 1349. 
10 Venezian, op. cit., p. 54. 



302 JOE M. BOHLEN AND GEORGE M. BEAL 

Sometimes an individual finds the only means of attaining a goal so 
unacceptable that he will substitute a lesser goal. The evidence that a 
large proportion of the farmers in Bivens's study thought it was better 
to buy a smaller farm and have less debt is a reflection of this phe- 
nomenon. It may be that some of the part-time farming that is rapidly 
increasing may be of the same nature. Some of these farmers prefer 
to supplement their incomes with off -farm jobs rather than assume the 
risk of borrowing to increase their farm size to a more nearly opti- 
mum unit. 

Production credit is used next to most frequently, and consumer 
credit is used least frequently. Bivens found that there was a differ- 
ence in the use of credit by specific production items. u Over 41 per- 
cent were using credit to purchase oil and gas, 34 percent to purchase 
feed, 30 percent to purchase livestock, 26 percent to purchase seed, 25 
percent for equipment maintenance, 22 percent for new machinery, and 
only 17 percent for fertilizer and lime. Only two items of farm pro- 
duction had lower credit use than fertilizer: repair on buildings, 5 
percent; and fencing and tiling, 2 percent. This differential use within 
categories was also found in the area of consumer credit. 

Individuals often hold conflicting values which they do not recognize. 
Some results of research in values indicate that once a basic value 
system is determined, it is very difficult — if not impossible — to change 
that value structure. The most that can be hoped for is to suppress a 
value in rational decision-making. It is also a well-known fact that one 
of the difficulties in measuring values and attitudes is that people often 
have "private " and "public" value and attitude systems. They may be 
quite conscious that their values do not conform to the generally ac- 
cepted norm, and in overt expression through statements or actions 
they attempt to purvey the "publicly" accepted value. 

Past research has demonstrated that various attitudinal concepts 
can be ope rationalized, measured empirically, and relationships deter- 
mined. Only limited research has studied the use of credit as the de- 
pendent variable. However, the limited evidence presented leads one 
to conclude that the study of the use of credit using sociological and 
social-psychological theory, concepts, and methodology should be a 
fruitful area of research that could give some significant answers to 
questions involving the *why" of the use or lack of use of credit by 
farmers. 



11 Bivens, op. cit. 



Chapter 21 

ARTHUR J. COUTU 

QUENTIN W. LINDSEY 

North Carolina State 
College 



Farmers Attitudes 
Toward Credit and 
Capital 1 



IN THIS CHAPTER the attitudes of low- income farmers toward credit 
will be of primary interest, but the attitudes of farmers in other in- 
come categories will be considered (cf. discussion by Bohlen and Beal 
in Chapter 20). Credit will be regarded as an important and powerful 
phase of economic policy; and, although emphasis will be upon attitudes, 
it will be assumed that attitudes toward credit policy cannot be consid- 
ered in isolation from the policy itself. 

The objectives of this chapter are as follows: (1) to present a con- 
cept of credit and to relate this concept to the attitudes of farmers; (2) 
to characterize in some detail farmers* attitudes toward credit under 
existing policy; and (3) to suggest how the attitudes of farmers toward 
credit can be altered by changes in credit policy. 



CREDIT AND THE POLICY ISSUES 

Credit is viewed to be essentially a power concept. In the process 
of borrowing money, a farmer obtains the economic power to carry out 
a particular course of action, however limited it may be. Although 
credit may be expressed in monetary terms, this power to effect action 
or change is of major concern here. 

A credit system may exert a powerful influence upon the rate that 
agricultural firms and areas reorganize in the wake of technological and 
related economic forces. Credit is a joint affair; the borrower and the 
lender decide together, implicitly or explicitly, upon the nature and scope 
of the action which credit makes possible. Through security require- 
ments and repayment terms, they also decide upon the nature and extent 
of the relationship between them. Because of this close relationship, 
credit institutions are of strategic importance in considering the atti- 
tudes of farmers toward change. A relevant question is whether in the 
design of general agricultural policy sufficient attention is being given to 
the policies of these institutions. The thesis presented in this chapter is 
that essential changes in the economic organization of agriculture can be 



Approved by the Director of Research of the North Carolina Agricultural Experiment 
Station as paper No. 1158 of the journal series. The authors are indebted to James G. 
Maddox and W. D. Toussaint for their constructive criticisms and suggestions. 

303 



304 ARTHUR J. COUTU AND QUENTIN W. LINDSEY 

greatly accelerated, particularly in critically low- income areas of the 
South, by strengthening the role of credit institutions. 2 

Essential changes in organization involve the transfer of human and 
physical resources between agriculture and the nonagricultural sector, 
and the regrouping of resources within agriculture. They also involve 
the learning processes of individuals, both those who remain in agricul- 
ture and those who transfer to other activities. Through appropriate 
modifications in credit policy, alternatives open to farmers may be al- 
tered so that they would prefer to make adjustments at the rate and to 
the extent necessary to bring income levels up to a par with those pre- 
vailing in nonfarm sectors of the economy. In short, modification of 
credit policy, in conjunction with other phases of policy, is necessary 
in dealing effectively with the attitudes of farmers toward credit and 
capital. 



FARMERS' ATTITUDES 

Attitudes of farmers toward credit are reflected in their decisions 
which may govern the influence that a credit institution may exert upon 
the internal operation of the farm business. Attitudes toward credit 
represent just one aspect of the decisions which a farmer makes that 
define the scope of his activity, and thus characterize who he is and 
what he does. These decisions are concerned with such matters as per- 
sonal judgments with respect to his own abilities, the choice of re- 
sources over which control may be secured, and opinions pertaining to 
the individuals, firms, and institutions that make up the environment in 
which he exists. Within the limits established by these broad decisions, 
a farmer makes lesser decisions with respect to what to produce, when 
to sell, the use of his leisure time, choice of consumption items, and 
many others. Interest here is in the broader attitudes of the operator 
which govern, on the one hand, the extent to which the external environ- 
ment shall influence the internal operation of the farm, and on the other 
hand, the nature and internal strength of the decision- making unit. 

At any point in time, the attitudes held by a farmer may lead either 
to the growth or deterioration of his farm business. The environment 
external to the farm is constantly changing under conditions of techno- 
logical advance, population growth, and rising per capita income. Un- 
less the operator keeps pace with events beyond his control, his prob- 
lems become analogous to those of the private within a platoon of march- 
ing men. If the private slows his pace to less than the given cadence, he 



2 The ideas expressed in this chapter are based largely upon the experience of the authors 
in working closely with farm families in North Carolina. This experience is reviewed in A. J. 
Coutu. E. L. Baum, and R. M. Ray, An Analysis of the Parker Branch Watershed Project 
1953 Through 1959: A Progress Report, T60-3AE, N. C. State College and Tennessee Valley 
Authority Cooperating, Knoxville, Tenn., 1960; and Quentin W. Lindsey, Transforming Low 
Income Farms into Profitable Commercial Farms and Financing the Development of Com- 
mercial Farms, Department of Agricultural Economics A. E. Info. Series Nos., 76 and 77, 
N. C. State College, Raleigh, N. C, 1960. 



FARMERS' ATTITUDES TOWARD CREDIT AND CAPITAL 305 

must minimize the onslaught of trampling feet behind him; if he quickens 
his pace, he must trample over those in front. He can force the platoon 
to follow his choice of cadence only if he possesses great strength. 

The role of the farm operator in the economic community in which 
he exists is at once more complex and less rigorously defined than that 
of the army private. It varies with the operator's tenure status, age, 
health, and education, and with the size and type of farm. It also varies 
with the economic conditions of his community. But regardless of the 
setting, the farmer's attitudes coordinate his pace with the cadence of 
events about him. 



Aversion to Change 

If a farmer has fallen behind the general pace of economic events, 
his business is likely to be in a state of relative, if not absolute, decline. 
Two choices are open to such a farmer, viz., (1) he may seek to regain 
a position within the bounds of successful business enterprise, in which 
case a burst of energy will be required; or (2) he may choose to prolong 
his existence as a going concern by shrinking within a shell of partial 
economic isolation because the required energy may be beyond his ca- 
pacity. If he chooses the latter approach, his attitudes may be charac- 
terized by the term "aversion to change. " 

There is an internal and an external phase to these attitudes. If an 
attitude is identified by the influence it has upon the internal operation 
of the farm, this is identification by the internal phase. The same atti- 
tude may be identified by its external phase through the relation it es- 
tablishes between the farm and an external firm or institution. For ex- 
ample, a farmer whose attitude prohibits him from accepting credit 
implies by this attitude that he does not want, under the terms specified, 
the additional resources which credit might empower him to obtain. 

Low- income farms. On the low- income farms of the South, aversion 



to change is the predominant attitude. These farms may be identified 
roughly as those in Economic Classes V and VI in the census classifica- 
tion of farms. Experience in working with low- income farmers indicates 
that they consider it impossible to catch up with the present tempo of 
economic advance, and have chosen to conduct a holding operation to 
preserve a known mode of existence as long as possible. The internal 
phase of their aversion to change manifests itself in their effort to pre- 
serve the system of farming with which they are familiar, but the ex- 
ternal phase is linked with each internal phase. The terms for available 
credit may be so stringent that, given the relatively large volume of 
credit which may be required to transform the farm into a thriving com- 
mercial unit, the fear of losing all that is now possessed prevents the 
accomplishment of change of any magnitude, except over very long pe- 
riods of time. (Discussions related to this problem are presented in 
Chapters 13, 14, and 20.) Success may hinge upon the maintenance of 
good health, curtailment of leisure, or the mastery of new farming 



306 ARTHUR J. COUTU AND QUENTIN W. LINDSEY 

methods. Future benefits may not be visualized with sufficient clarity 
to cause the farmer to assume the risk and expend the necessary effort 
to learn, particularly if he regards the learning process to be costly 
and of considerable duration (cf. discussions in Chapters 22 and 23). 

In communities where low- income farms are common, individuals 
also may fear the social ridicule resulting from failure and foreclosure. 
Even if successful, they realize that a change in income will affect their 
social status and that ostracization by existing acquaintances may occur. 
In order to change materially the organization and operation of his farm, 
a low- income farmer must deal with marketing firms or factor supply 
houses with which he is unfamiliar. These will likely be large concerns, 
and he may feel incapable of dealing with them in equitable terms, so he 
shuns any opportunity to do so. Or there may be a feeling of social in- 
feriority associated with these contacts, as was the case in one instance 
of our experience in which the farmer felt that to attend a purebred 
heifer sale would be to step over a distinct social boundary. Whatever 
the reasons for these attitudes, the typical low- income farmer has de- 
cided that the gap to be spanned in bringing his farm up to modern com- 
mercial standards is more than he can negotiate. 

Medium-income farms . In many respects, aversion to change by 
operators of medium- income farms is similar to that found for low- 
income farmers. These are farms with characteristics below par for 
thriving commercial farms of similar types, but which distinctly are 
not low- income farms. They fall, for the most part, in Economic Classes 
III and IV. The operators of such farms formulate attitudes on much the 
same basis as low- income farmers; but they tend to give greater con- 
sideration to market conditions, perhaps because their economic isola- 
tion is less pronounced as they are more familiar with price and income 
relationships. They are aware of the general nature of the technological 
and economic knowledge required in modern farming, but their aware- 
ness is so limited that they become confused and frustrated. Under the 
repayment conditions associated with available credit, medium- income 
farmers are unable to visualize with sufficient clarity the line of action 
that must be taken to reorganize their farms successfully. Consequently, 
they tend to postpone or evade decisions essential to change and cling to 
their present system; or if they do change, the process occurs in a piece- 
meal or partial form. Failure in the use of credit in accelerating farm 
adjustments because of unfavorable price behavior or improper manage- 
ment would, in their view, destroy their sources of livelihood more rap- 
idly than a gradual decline through failure to reorganize. 

High-income farms . There may be ways high- income farms can be 
reorganized which will not result in loss in net income, and which will 
enhance communitywide change. Credit may be required to accomplish 
such reorganization. But these farmers may reject the use of credit for 
these purposes because they fear that, in destroying the status quo, their 
prestige will be undermined. 

Not all high- income farmers are averse to change, and of those who 
are, other reasons may exist for their being averse to change. Changes 



FARMERS' ATTITUDES TOWARD CREDIT AND CAPITAL 307 

in external relations become necessary as farms are reorganized, re- 
gardless of the size or income level. Managerial responsibilities change 
and new methods must be learned. Alternative investments in nonfarm 
activity may appear more favorable to the operator, and further growth 
of the farm is curtailed as funds are channeled elsewhere. The question 
of how the farm business may be transferred intact from one generation 
to another may also inhibit change. 



Propensity to Change 

Farmers who decide to improve their income levels or attain some 
higher goal with respect to economic and social status tend to have atti- 
tudes which are characterized by the term "propensity to change." An 
individual with a high propensity to change looks with favor upon the re- 
wards associated with successful development of his farm, and is not 
disturbed by the possibility of failure, increased managerial responsi- 
bilities, the dangers of ill health, social ridicule, and other fears which 
usually inhibit those who are averse to change. 

Propensity to change implies more than the simple willingness or 
desire to change. It includes the ability to develop and operate a farm 
exhibiting the technical and organizational characteristics of modern 
agriculture, together with the power to accomplish such an undertaking. 3 
In the preceding section it was taken for granted that an individual who 
chose to pursue a holding action would possess the ability and power to 
do so. This is a characteristic assumption when discussing aversion to 
change. But in considering propensity to change, one feels impelled to 
stress the fact that ability and power to change, in addition to desire, 
are required. Only if all three seem real to the individual will positive 
attitudes toward change come to the forefront in his mind. 

In contrast with aversion to change, propensity to change requires a 
greater expenditure of energy by an individual. Mechanically, it is the 
difference between accelerating and decelerating relative to one's en- 
vironment. But the concepts are the same since both involve those atti- 
tudes which provide the basic links between the internal operation of the 
decision- making unit and the environment external to it. 

Propensity to leave the farm. Given the fact that technological ad- 
vances in agriculture lead to a decline in the farm labor force, propen- 
sity to change must also encompass attitudes toward nonfarm activity. 
These include the desire to obtain nonfarm employment, the ability to 
master the skills involved, and the power to make the transition. For 
those who are of retirement age, the change may be to noncommercial 
farm activity of a suitable nature; i.e., people who contemplate retiring 
cannot be expected to look forward to a world of idleness, yet the rigors 



3 Ability may be latent in the sense that an individual has the capacity to learn the essen- 
tial managerial skills, but they have not yet been mastered. In this case, power to change 
must include the econonic power to gain control of essential resources and to learn how to 
use them through formal or informal training. 



308 ARTHUR J. COUTU AND QUENTIN W. LINDSEY 

of modern commercial farming may overtax their energies. Although 
many such individuals may have been commercial farmers with a high 
propensity to change, as they reach retirement age their attitudes will 
likely shift in the direction of aversion to change unless retirement ac- 
tivities of a nonfarm or part-time or residential farming nature which 
appeal to them are developed. 4 

Variation of propensities. The implication that attitudes may shift 
as individuals become older suggests that farmers' attitudes vary under 
different circumstances. Certainly age is an important factor. Closely 
associated with age is experience, both vocational and social experience. 
The level of formal education is also highly influential, not only because 
education improves an individual's knowledge of his environment, but 
his self-confidence is affected also (Chapters 22 and 23). Tenure status 
has a bearing on individual attitudes because of the social significance 
and the degree of control over resources associated with various tenure 
gradations. It is not the purpose here to elaborate upon how attitudes 
vary (this aspect is discussed adequately by Bohlen and Beal in Chapter 
20) but rather to conceptualize the relationship between the attitudes of 
individual farmers and credit policies. 

The role of credit . Through analyses of the circumstances which 
give rise to the attitudes of individuals, the power of credit institutions 
may be directed toward creating a situation wherein their attitudes shift 
from aversion to change to a state of propensity to change. It is impor- 
tant to note that much attention has been given to generating the desire 
to change through various kinds of advertising media in this country, and 
that our educational system is oriented toward creating individual ability 
to change. In the nonagricultural sectors of the economy, various finan- 
cial devices, ranging from corporate structures to installment credit 
systems, have been created to provide the power to change. 

It appears that less emphasis has been given to these matters in the 
farm sector. We have an elaborate research organization to develop the 
technological changes for farmers; the Extension Service and related 
educational activities are organized to convey knowledge of these innova- 
tions to the agricultural sector. The magnitude of the changes which 
many farm families must make as a result of research and development 
exceeds, in our opinion, the power of farmers to change under current 
policies of credit and related institutions. Without the power to change, 
technical and economic information transmitted through the Extension 
Service is far less meaningful to farmers, and aversion to change be- 
comes the predominant attitude. To create a propensity to change in its 
full meaning requires not only greater persuasive ability on the part of 
educational agencies, but also provision of the power to change. This 
condition is considered to be the role of credit. 



Policies pertaining to noncommercial farming need to be developed carefully and inte- 
grated with those discussed in the last section of this chapter. 



FARMERS' ATTITUDES TOWARD CREDIT AND CAPITAL 309 

THE DESIGN OF CREDIT POLICY 

In the past, credit policy has been closely associated with efforts to 
increase farm income largely through increases in output. The main 
purpose of agricultural credit policy, as proposed here, will be concerned 
with facilitating the process of resource adjustment within agriculture, 
and between agricultural and nonagricultural sectors. Since the nation 
is confronted with surpluses of various commodities, these adjustments 
must include the exodus of labor from the farm. This implies that non- 
farm work must be available; however, a nonfarm employment policy 
will be excluded from the analysis that follows. Whether increases in 
aggregate farm output will or will not result, will depend upon the nature 
of policies concerned with supply control. 



Variables at Our Disposal 

One of the principal sets of variables subject to modification in the 
design of credit policy is composed of the eligibility requirements of the 
prospective borrower, i.e., decision- making unit. For example, real es- 
tate credit is seldom extended to an operator who does not possess title 
to property or who, with the credit extended, will not obtain title to prop- 
erty. Thus, eligibility for credit under present policy varies by tenure 
status and is closely associated with the value of property and the indi- 
vidual's equity therein. Moreover, present policies place emphasis upon 
past performance rather than upon future capacity to perform. A young, 
immature individual is less eligible for credit than a man in his prime 
with a well-established reputation. Future capacity is considered in a 
negative sense in that as one reaches retirement age, or becomes inca- 
pacitated, eligibility is likely to decline to the amount which can be amply 
secured by owned property. Use to be made of funds borrowed is an- 
other eligibility consideration, particularly as the size of loan approaches 
or exceeds security limits. 

Closely related variables include size of loan, interest rate, and re- 
payment conditions. In fact, these are variables in terms of which eligi- 
bility is quantified. If a credit institution is to change the rate of farm 
adjustment, it must alter its criteria for judging an individual's eligibil- 
ity by modifying the volume and types of credit offered, the interest rate 
charged, the conditions of repayment, and the associated contingencies 
such as restrictions on the use to be made of borrowed funds — as sug- 
gested previously by Murray, Diesslin, and Engberg. Modification must 
be made to the point where, in the judgment of the prospective borrower, 
it is distinctly to his advantage to accept the credit terms offered. His 
attitude then shifts from one of aversion to one of inclination or propen- 
sity to change. 

In overcoming aversion to change by altering the terms of eligibility, 
the credit institution cannot completely relinquish the balance of power 
in deciding upon the limits within which a borrower's action must take 



310 ARTHUR J. COUTU AND QUENTIN W. LINDSEY 

place. Its power to effect change would be quickly dissipated if this 
were the case, and it would become bankrupt. It can, however, alter 
the limits within which the borrower may act, perhaps closing off pre- 
vious avenues and opening new ones, as will be suggested in the follow- 
ing sections. 



Credit To Facilitate the Exodus of Labor 

Although it will not be possible to examine the adjustments needed 
in agriculture in detail here, clearly there must be further exodus of 
labor from farms, particularly in the low- income areas of the South. 
This is necessary to improve incomes of those who leave, and to make 
it possible for those who remain to regroup resources into more profit- 
able units. Hendrix and Lanham ably developed this point in their dis- 
cussion. 

It is proposed that the Soil Bank program be modified, making it pos- 
sible for individuals who own real estate to place their farms in the Soil 
Bank and draw at an accelerated rate— even to the extent of one lump 
sum — the conservation reserve payments which are now made over an 
extended period. 

In order to encourage release of land for future utilization by those 
who remain in agriculture, the U. S. Department of Agriculture would 
make accelerated payments on the condition that farms could be (1) pur- 
chased by the Department at prices determined at the time farms were 
placed in the Soil Bank, or (2) leased by the Department to other oper- 
ators. Either the Department or the individuals could request that the 
purchase agreement be exercised at any time while the land is in the 
Soil Bank. An individual could prevent the Department from exercising 
the purchase agreement only by repaying all funds received in the form 
of Soil Bank payment plus, perhaps, a specified interest charge. If nei- 
ther chose to exercise the purchase agreement, the farm would revert 
to the individual upon expiration of the entire period for which the land 
was committed to the Soil Bank. If the Department of Agriculture chose 
to lease a farm to another operator, the rent would be retained by the 
Department. The owner could continue to lease the farm if he so de- 
sired upon expiration of the Soil Bank agreement. In order to induce in- 
dividuals to place farms in the Soil Bank under these conditions, an in- 
centive bonus could be offered above the regular rate. 

Individuals of retirement age who find this program attractive could 
use the accelerated payments to purchase dwellings within their home 
communities or in distant communities. Their social security payments 
would then come nearer to providing them with an adequate standard of 
living. They could also anticipate additional revenue from sale of their 
property in later years. 

Farmers who are young enough to consider nonfarm employment 
could utilize the accelerated payments to finance moving, vocational 
training, and other expenses associated with changing occupations. Once 






FARMERS' ATTITUDES TOWARD CREDIT AND CAPITAL 311 

the transition is made, revenue from the sale of their farms could be 
used to finance the purchase of dwellings near their new employment 
location. 

Turning next to individuals and families without title to real estate 
who may be induced to leave the farm labor force — tenants, croppers, 
and hired laborers — it is proposed here that those who are capable of 
becoming qualified for nonfarm employment be extended credit to finance 
moving, vocational training, or other forms of education, and minimum 
living expenses during the transition period. Credit extended would be 
to upgrade the earning capacity of the individuals and would be contin- 
gent upon their executing a carefully developed plan for training and 
employment (cf . Mackie's discussion in Chapter 22). Their age and abil- 
ity would need to be considered carefully, and guidance provided by ap- 
propriate agencies to insure execution of plans or modification when 
necessary. A low rate of interest would be charged and an extended re- 
payment period prescribed, possibly on a payroll deduction basis after 
the individuals obtained employment. In urban centers where it is con- 
sidered feasible to do so, low rental housing could be provided during the 
transition period. Based on the experience of the authors, it would seem 
that attitudes of farm families toward the use of credit for these purposes 
will hinge largely upon the care with which plans for self- improvement 
are developed and executed. 

For those individuals and families without title to real estate who 
are of retirement age, it is proposed that low rental housing be provided 
in communities within reasonable distance of their present location. Ef- 
fort in this connection would contribute to the reorganization of agricul- 
ture in several ways. For example, the young couple that is providing a 
home for one or more parents may be averse to leaving a low- income 
farm for nonfarm employment because of anticipated city costs of sup- 
porting extra members of the family. 



Credit To Facilitate the Reorganization of Farms 

For those who remain in farming, credit should be made available 
to farm operators to enable them to gain control of resources and to de- 
velop their managerial ability, which will enable them to obtain incomes 
comparable to the compensation in other occupations requiring similar 
skill and energy. The objective of the policy is to establish an adequate 
operating unit on a continuing basis, and to relate the operator and his 
family to this unit in such a way that their initiative and proprietary in- 
terests are maintained at the highest possible level. Resources will be 
leased or purchased, depending upon the circumstances. Credit will be 
extended in amounts necessary to establish an "adequate" unit, provided 
that in planning the development and operation of each farm, the imputa- 
tion of returns to the resources is consistent with the price or rent per 
unit. No units will be established which are too small to provide income 
levels comparable to that which families could obtain in other pursuits. 



312 ARTHUR J. COUTU AND QUENTIN W. LINDSEY 

Where feasible, farms may be incorporated and credit provided to 
support the marketing of corporate stock or the purchase of a control- 
ling interest when shares are not salable at par value. When incorpora- 
tion is not considered feasible, credit will be extended on a long-term 
basis, subject to renewal when arrangements are adequately provided 
for continuity of the farm between generations. Credit totaling $80,000 
to $100,000 or more per farm will be necessary to establish or reorgan- 
ize farm units on a scale that will be adaptable to change and consistent 
with returns to labor equal to those earned in alternative employment. 

Credit will also be extended to cover costs associated with training 
individual operators as well as for the acquisition of necessary physical 
resources. Training may range from a short course of a few weeks' 
duration for those with appropriate experience to as much as four years 
of college for young men with little experience. For those in this latter 
category, the credit advanced will be similar to that extended to young 
men who leave the farm. Those who have decided to remain will have 
oriented their education toward agricultural pursuits, and upon comple- 
tion of their training, the credit advanced for this purpose will be com- 
bined with that required to establish them in farming. 



Rate of Reorganization 

With respect to the reorganization of farms by those who remain, 
the rate at which organization must occur will depend upon the produc- 
tion requirements, which would be specified by policies concerned with 
the product markets. Unless increased use of so-called surplus com- 
modities is foreseen at home or abroad, the rate must proceed rather 
slowly since reorganization involving the use of new technology leads to 
increased output. The emphasis in the beginning should be concerned 
with the development of a sound basis for reorganization, rather than in 
reorganizing farms at the maximum rate. This may be accomplished by 
inducing individuals to place their farms in the conservation reserve for 
extended periods. For example, if a farm is placed in the Soil Bank for 
ten years, and if within that time production requirements increase to 
the point where it becomes necessary to bring it back into production, 
the U. S. Department of Agriculture could exercise its right to purchase 
or lease the farm and establish a new operator or combine it with a unit 
operated by someone who has remained in farming. 

The rate and quality of farm reorganization may also be influenced 
by the nature of the educational program established. Clearly the use of 
large quantities of credit to establish large and efficient farm units must 
be based upon careful planning and either considerable training of the 
operator or a great deal of supervision. The cherished processes of 
"growing into farming" and associated "learning by doing" have become 
outmoded. An inexperienced farmer cannot be placed in charge of a 
$100,000 operation. An individual is not likely to "grow into" this posi- 
tion within a lifetime, considering present rates of profit in farming. 



FARMERS' ATTITUDES TOWARD CREDIT AND CAPITAL 313 

Moreover, a supervisory service large enough to provide the manage- 
ment on the $100,000 operation while the operator learns to master the 
business is too expensive. 



The Shift in Attitudes 

In proposing these changes in policy, it is contended that the attitudes 
of farmers toward credit and capital which are classified under the head- 
ing "aversion to change" may be transformed into those which are grouped 
under the heading "propensity to change." Underlying this contention is 
the belief that, given their state of knowledge, the resources at their dis- 
posal, and the risks associated with present alternatives open to them, 
farmers are behaving rationally in formulating their present attitudes. 
Based upon our experience, it is our view that an educational program 
alone, aimed at simply acquainting low- and medium-income families 
with how additional capital may be used to improve income or with the 
fact that nonfarm wage rates exceed their own earning rates, will not al- 
ter these attitudes at the desired rate. 



Administrative Structure 

The magnitude of the problem of farm reorganization varies among 
individuals and among geographic regions in the United States. Hence the 
administration of programs designed to cope with this problem must vary 
from one region to another, and must be capable of differentiating among 
individuals within a region. 5 Enabling legislation should be passed on a 
national basis, but geographic areas or regions should formulate plans 
for development and establish administrative units which will unify ac- 
tivities of various agencies involved. Two advantages of the suggested 
approach are: (1) it facilitates the adoption of policies to fit specific 
regions, and (2) appropriations necessary for a program of this nature 
on a national basis would be huge, hence regional appropriations might 
be easier to obtain. 

Space does not permit an elaboration of the public and private admin- 
istrative structure that must accompany the suggested reorientation of 
our agricultural credit policy. Clearly, what may be construed as credit 
policy must shade off into other policies in many instances. Existing 
credit institutions could be reorganized to accomplish much of the financ- 
ing associated with the reorganization of farms. The Department of 
Health, Education, and Welfare has limited programs designed to assist 
individuals in shifting occupations or improving their productive capacity. 
These and similar programs could be accelerated for individuals who 
leave agriculture. Private credit institutions should be encouraged to 



5 Area development research under way in the Southeast, designed to estimate supply 
functions, to suggest optimum enterprise organizations, or to suggest profitable shifts in 
resource ownership, should provide useful data for guiding administrative decisions. 



314 ARTHUR J. COUTU AND QUENTIN W. LINDSEY 

modify their policies to the extent that their financial strength will per- 
mit. Continued use of insured loans could be made in channeling private 
funds into financing the reorganization of a reduced number of farms or 
the transfer of individuals to nonfarm work, although some subsidization 
of interest rates may be necessary if our nation continues to rely heavily 
upon monetary and fiscal policy to control inflation. Since it is assumed 
that price support and production control policies will be flexible enough 
to reflect increased production efficiency, a portion of expenditures go- 
ing into these programs might be better channeled into providing farm 
reorganizational assistance. Educational institutions, including the agri- 
cultural extension service and nonfarm vocational training schools, 
would become closely involved in training individuals for farm and non- 
farm work. 

Private credit institutions would likely gain materially from such 
activities because both urban and rural economic activity would be en- 
hanced. In the process of channeling funds into these activities, addi- 
tional taxes or the transfer of funds from other uses should be utilized, 
except during periods of recession, because the program could have an 
inflationary effect. It is also important that policies concerned with non- 
farm employment levels be oriented so that the nonfarm sectors of the 
economy could absorb additional labor released from agriculture. 



Shift in the Structural Location of Decision- Making 

The proposed policies shift the structural location of decision- making 
in this sense: Credit institutions, in offering the terms of credit to in- 
duce individual farm operators to change, would be exerting active power 
in guiding the course of economic activity. Their power is passive in the 
sense that individuals are free to accept or reject the terms offered. 
But if individuals alter their attitudes and accept power to change inher- 
ent in the credit extended, decisions of credit institutions, with respect 
to the nature and direction of economic change, take on added signifi- 
cance. In effect, the seemingly impersonal power of the market mecha- 
nism in guiding individual activity is being supplemented by the decisions 
of credit institutions in conjunction with other policies governing orderly 
growth. This effect must be made explicit and thoroughly understood 
because the responsibilities of credit institutions become greatly in- 
creased. 



Discussion 



M. R. JANSSEN * 

The description by Coutu and Lindsey of the causes and extent of in- 
ternal and external capital rationing is similar to the results of a recent 
credit use study in a commercial farming area of central Indiana. 1 Low- 
income farms were not included in the study, although there are few low- 
income farms in central Indiana that are not part-time farms or farms 
of semi-retired operators. Thus, a part of the adjustment suggested for 
the Southeast is occurring in other areas where off- farm opportunities 
exist. In one agricultural township in central Indiana, a surprisingly 
large number of rural residents had off- farm employment; a substantial 
number of members of farm families also had employment outside agri- 
culture. 

Of the farmers in the Indiana study with over 100 acres and without 
substantial off-farm employment, only 29 percent had less than $20,000 
invested in their business, and almost 50 percent had an investment of 
over $40,000. Ninety percent of the farmers studied had over 60 percent 
equity in their businesses. Twenty- two percent used no credit, so it 
would seem that there is no major credit problem in this commercial 
farming area. However, investigation of the type of farm unit that would 
provide full-time profitable employment, if capital were available, re- 
vealed that about 11 percent of the farmers did not wish to increase size 
of business because of limitations such as age or health. Some 14 per- 
cent of the farmers having an excess of $100,000 investment in the busi- 
ness could not profitably invest additional capital in the business. The 
remaining three-fourths of the farmers had some form of capital ration- 
ing. Sixty-five percent of the farmers operated under the restrictions 
of internal capital rationing, while only 10 percent were faced with ex- 
ternal capital rationing. 

Data obtained from the study of 110 farmers in central Indiana who 
were faced with capital rationing were used to test the hypothesis that 
internal capital rationing was a function of net worth, reaction to uncer- 
tainty, knowledge, attitude, and age of the operator. In a linear regres- 
sion analysis, net worth, knowledge, and reaction to uncertainty were 
significant at the 5 percent level. Attitude was significant only at the 
13 percent level, and age was not significant. The correlation between 
age and net worth was relatively low. The coefficient of multiple deter- 
mination differed significantly from zero at the 1 percent level. The re- 
gression explained only 27 percent of the variability. More research 



♦Agricultural Economist, Farm Economics Research Division, Agricultural Research 
Service, U. S. Department of Agriculture. 

X L. F. Hesser and M. R. Janssen, Capital Rationing Among Farmers, Purdue Agr. Exp. 
Sta. Res. Bui. 703, Sept., 1960. 

315 



316 ARTHUR J. COUTU AND QUENTIN W. LINDSEY 

must be conducted if we are to improve measurements of values and at- 
titudes. In this study, the Guttman Scalogram analysis was used with a 
series of statements in which individuals indicated their degree of agree- 
ment or disagreement with the statements. When these statements were 
properly selected and ordered, a continuing scale resulted which indi- 
cated the relative degree of attitudes or values of individuals. 

Coutu and Lindsey recommend the adoption of a policy of extension 
of credit to low- income farmers to train them for off- farm employment 
and to move them from farms to places of nonfarm employment. This 
policy can be employed well and with limited cost in areas with as good 
opportunities as are afforded in many parts of the East North Central 
states. However, the costs of moving from those areas where only 
limited opportunities exist are substantial. The risk of unemployment 
after moving from such areas is also great, as few alternative opportu- 
nities exist until seniority is achieved in the new employment. These 
difficulties must be recognized if any such approach is to be successful. 

Coutu and Lindsey also recommend a policy of credit extension for 
farm reorganization. Obviously, farmers on the reorganized farms will 
need to make adjustments, but these needed adjustments seem to be less 
harsh than those of moving out of agriculture. For this reason, the prob- 
lem of determining who will move out and who will remain in agriculture 
must be dealt with adequately. Assuming that administrative machinery 
can be devised to carry out the program, how can the decisions as to 
who should continue in farming and who should be encouraged to seek 
nonfarm employment be implemented? Thomas has provided profes- 
sional farm managers an objective method of selecting tenants for farms 
they manage. 2 While the method is not applicable, the system is likely 
to provide a means of selecting those farmers with the highest probabil- 
ity of success in agriculture relative to nonagricultural pursuits. 

WAYNE A. CORPENING * 

Coutu and Lindsey indicate two broad approaches that should be taken 
to overcome the problems of periodic reorganization in agriculture. One 
is concerned with policies related to product markets; the other relates 
to factor markets. In short, they say that aggregate farm supply must 
be controlled and price stabilized for proper distribution of income with- 
in agriculture, and between agriculture and the nonagricultural sector, 
if the task of reorganization is to be accomplished in an orderly fashion. 
They state that age and tenure status of farmers have much to do with 
actions. 

In discussing the design of credit policy, they point out that lending 
institutions have much to do with the changes in reorganization that oc- 
cur, and that some of the present policies might not be best for all 



2 D. W. Thomas, E. J. McCormick, and R. E. Blanchard, An Objective Method of Select- 
ing Farm Tenants, Purdue Agr. Exp. Sta. Bui. 678, April, 1959. 

""Vice-President and Manager, Agricultural Department, Wachovia Bank and Trust 
Company, Winston-Salem, North Carolina. 



DISCUSSION 317 

concerned. An example is the emphasis placed on past performance in- 
stead of on future capacity. 

In order to facilitate reorganization in agriculture, the authors pro- 
pose to: (1) let the federal government, through USDA, Soil Bank, and 
conservation payments, take the lead in helping make some of these re- 
organizations by making accelerated rates of payments; (2) give assist- 
ance to those leaving the farm and seeking nonfarm jobs, and also to 
older people in securing low rental housing in urban areas; and (3) make 
credit available to those remaining in agriculture on an "all or nothing" 
basis to enable them to gain control of resources and to develop their 
managerial ability. This will require about $100,000 per farm in many 
circumstances. 

There are many factors that determine what a farmer will do in mak- 
ing changes on his farm. One of the most important of these is attitude. 
The farmer who wants someone else to look after him is usually a person 
who will not be successful. The farmer should be assisted in such a way 
that he does not lose his self-respect, i.e., he must be a "proud person." 

Also, I do not believe that those of us with an interest in agriculture 
are responsible for a person simply because he lives on a small farm 
and does not want to do better. Should a good livelihood be guaranteed 
to anyone who says he wants to be a farmer, and yet will not carry out 
recommended practices? Perhaps his family, as well as agriculture, 
would be better off if he left farming and took employment in industry. 

I disagree somewhat with Coutu and Lindsey with respect to the rate 
of change of management necessary in increasing the profitability of 
farming. Experience cannot be replaced in farming, and it is possible 
to overload the borrower. 

I do not claim that private lending institutions are doing the job they 
should be doing. Many of us are not, and much work needs to be done. 
But we who are interested in agriculture want this industry to be on an 
equal level with other sectors of our economy. In trying to accomplish 
this, we must not ask for too many special considerations for agriculture 
— a step that might ruin us. 

Agricultural programs have been very important in North Carolina 
and the Southeast in helping to stabilize agriculture. It would have been 
very hard to have gotten along without them. But when we are planning 
for the future reorganization of farms, I do not know whether we should 
leave it to the "whims" of our political parties. 



Chapter 22 

Need for Greater Emphasis 
on Capital Investment in 
Human Resources 



ARTHUR B. MACKIE 
Tennessee Valley Authority 



A COMPREHENSIVE TREATMENT of society's investment in 
human resources would involve an analysis of the effects of in- 
creased incomes on productivity or income earning ability for 
those families which have low incomes. It would also include analysis 
of improved education, housing, recreational, and health services and 
facilities on total national income. Finally, it would appraise the ef- 
fects of other community services which would improve the general 
welfare of individuals and communities. Not all of these variables or 
forces can be treated in this chapter; therefore, the major implications 
of human resource development will be illustrated by concentrating 
upon investment in education. 

The current national interest in education and the need for a greater 
public investment in developing a higher quality labor force no doubt 
stems from the experience in manpower utilization during World War II 
and world economic competition. 1 The wartime experiences served to 
emphasize the need for a definite manpower policy since it was sud- 
denly realized that this "nation did not possess unlimited manpower 
resources and that care would have to be taken in utilizing the available 
supply. ■ 2 However, it was not until the development of the atomic bomb 
and the speed with which the Russians challenged the United States in 
the development of nuclear weapons that a full realization of the im- 
portance of the scientist in the contemporary world was fully recog- 
nized. 3 Also, during this period a fuller recognition was gained of the 
scientific-manpower problem and its relation to questions of economic 
development, and of the increasing dependence of American industry on 
discoveries in the laboratory. 4 In this scientific age, business, govern- 
ment officials, and economists are becoming increasingly aware that 



1 Eli Ginzberg, Human Resources: The Wealth of a Nation, Simon and Schuster, Inc., 
New York, 1958, pp. 28-29; Clarence H. Linder, "Trends in industrial requirements for 
scientists and engineers," Scientific Manpower 1958, National Science Foundation, NSF 
59-37, pp. 27-31. 

2 Ibid. 

'Chemical and Engineering News, "Education 'crash' program in the works," Dec. 16, 
1957, pp. 19-20. 

4 Phil N. Scheid, "Technical manpower accession and utilization analysis in an expanding 
decentralized company," Scientific Manpower 1958, National Science Foundation, NSF 59-37, 
pp. 14-26. 



318 



CAPITAL INVESTMENT IN HUMAN RESOURCES 319 

the limiting factor governing the nature and extent of the expansion of 
the American economy lies in the limit of the skills and competence of 
its work force. This phenomenon and the increasing interest in main- 
taining continuous economic growth of this country have undoubtedly 
been the major reasons for our growing concern about the lack of ade- 
quate education and training programs to meet this country's future 
manpower needs. 

Need for a greater emphasis on capital investment in human re- 
sources in agriculture cannot be considered apart from national inter- 
ests because of the interdependency of agriculture and the rest of the 
economy. National economic growth creates adjustment problems in 
agriculture and opens up new income opportunities for capital and hu- 
man resources both within and outside of agriculture. For example, 
technological progress within agriculture and the changing demand 
structure for agricultural products serve to create a surplus labor 
supply in agriculture; an expanding national economy creates additional 
nonfarm job opportunities and a demand for surplus labor. Utilization 
of excess labor in agriculture to further economic growth is dependent 
upon employment opportunities and manpower utilization in general. 
For these reasons it is necessary that an examination of national man- 
power problems and the nation's need for greater capital investment in 
human resources be made before the need for capital investment in hu- 
man resources through education in agriculture is considered. 



EMPLOYMENT AND ECONOMIC GROWTH 

National economic growth and technological progress have brought 
about changes in employment opportunities as well as changes in the 
demand for different types of goods and services. Predictions of eco- 
nomic growth indicate that even greater shifts in the kind and volume 
of goods and services produced are to be expected. 5 These changes 
will necessarily cause important differences in the distribution of in- 
dustrial employment to emerge. 

The growth of the nation's labor force over the years has been ac- 
companied by sharp changes in the relative size of different industries 
and occupations which have greatly affected employment opportunities. 
For example, the proportion of the total labor force in agriculture has 
declined with expansion and growth of the national economy. The shift 
from farm to nonfarm work will necessarily continue with expansion of 
the total economy and increased agricultural technology. Data illus- 
trating this trend are cited in Chapter 1. As farm employment con- 
tinues to drop and the number of farms decreases, an increasing num- 
ber of our rural youth will have to look to nonfarm work. The type of 
nonfarm employment for which these rural young people can qualify 
will be determined largely by their education and vocational skills. 



5 U. S. Department of Labor, Occupational Outlook Handbook, Bui. No. 1255, Washington, 
1959. 



320 ARTHUR B. MACKIE 

Historically, the proportion of the labor force engaged in agricul- 
ture has declined with expansion and growth of the national economy. 
The existence of a geographic pattern of underemployed human re- 
sources in an era of rapid national economic growth has been associ- 
ated with regions that have a high proportion of the labor force in agri- 
culture. 6 For example, the proportion of the labor force engaged in 
agriculture is higher in the Southeast and the Tennessee Valley region 
than for the nation. In 1940 approximately 45 percent of those em- 
ployed in 11 southeastern states were in agriculture, while only 23 
percent were so employed for the nation (Table 22.1). The decline in 
farm employment since 1940 for the Southeast was greater than for the 
nation, but the proportion of total employment engaged in agriculture in 
this region was approximately twice that for the nation in 1958. These 
data, in addition to migration and farm income data, emphasize the ex- 
istence and persistence of a surplus labor problem in agriculture and 
emphasize the fact that this surplus is closely related to general eco- 
nomic growth. Hendrix and Lanham developed this point in Chapter 14. 

As with agricultural employment, industrial employment since 1940 
has undergone changes which have caused alterations in employment by 
occupational groups. These changes in the labor forces of the nation 
and the Southeast between 1940 and 1950 are presented in Table 22.2 
and Figures 22.1 and 22.2. These data indicate the nature of the de- 
clining employment in farming and the unskilled labor groups, and the 
increasing importance of the semiskilled, skilled, and scientific groups 
since 1940. During the 1960-70 period, changes in the distribution of 
employment opportunities are expected to continue with increases in 
the skilled and technical groups exceeding the increases in the semi- 
skilled and nonskilled labor groups, since technological advances are 
expected to permit large gains in production without corresponding in- 
creases in the number of semiskilled workers. 7 The necessary invest- 
ment capital in physical production factors required to expand output 
undoubtedly will be forthcoming, but the important question is to what 
extent will additional capital be invested in developing an adequately 
skilled and educated labor force to meet the changing needs of our ex- 
panding economy. Since the Southeast has the highest proportion of the 
total farm population, as well as the majority of the low-income or un- 
deremployed rural people, the extent to which public and private funds 
are allocated to the development of these human resources is expected 
to affect the future rate of growth for the nation. This consideration is 
important since one of the greatest opportunities for human resource 
development lies in the surplus farm labor force of the South. A more 
complete utilization of these human resources would make an important 
contribution to national and regional economic growth. It would also 



6 William E. Hendrix, "Income improvement prospects in low-income areas," Jour. 
Farm Econ., Vol. 41, No. 5, Dec, 1959, pp. 1065-75. 

7 U. S. Department of Labor, Occupational Outlook Handbook, Bui. No. 1255, Washington, 
1959. 



CAPITAL INVESTMENT IN HUMAN RESOURCES 



321 



Table 22.1. Percent of Persons Engaged in Agriculture and Wage and Salary 

Employees in Nonagricultural Establishments, United States and Selected 

Areas in the Southeast, 1940, 1950, and 1958 











Percent change in employment 




1940 


1950 


1958 


1940-50 


1950-58 


1940-58 






(percent) 










United States 
Total employment a 
Agriculture b 
Nonagriculture 


100 
22.9 

77.1 


100 

14.4 
85.6 


100 
10.4 
89.6 


25.6 

-21.3 

39.6 


7.9 

-22.2 

13.0 


35.6 

-38.7 

57.7 


11 S. E. States 
Total employment 61 
Agriculture b 
Nonagriculture 


100 

45.1 
54.9 


100 
29.0 
71.0 


100 
20.3 
79.7 


13.2 

-27.3 

46.5 


10.3 

-22.8 

23.8 


24.9 

-43.9 

81.4 


7 Tenn. Valley States 
Total employment 
Agriculture b 
Nonagriculture 


100 
45.6 
54.4 


100 
30.0 
70.0 


100 

21.5 
78.5 


11.9 

-26.6 

44.2 


5.9 

-23.9 

18.6 


18.4 

-44.2 

71.0 


Tenn. Valley (125 Cos.) 
Total employment 
Agriculture b 
Nonagriculture 


100 
47.7 
52.3 


100 
34.6 
65.4 


100 
25.8 
74.2 


10.6 

-19.9 

38.4 


2.6 

-23.5 

16.4 


13.5 

-38.7 

61.1 



Source: Nonfarm data for the U. S. and states are from the U. S. Bur. of Labor Stat., 
Ann. Suppl. issues of Employment and Earnings. 

a The employment estimates cover the annual average number of persons engaged in 
agriculture, and wage and salary employees in nonagricultural establishments in- 
cluding federal, civilian, and state and local school and nonschool governments; min- 
ing; manufacturing; contract construction; transportation, communication, and public 
utilities; trade; finance; and service. Nonfarm proprietors, domestics, and profes- 
sional non-salaried trade and service workers are not included. Agriculture in- 
cludes farm operators, hired workers, and unpaid family workers. 

Agricultural employment estimates for the U. S. are the annual estimates compiled 
by the U. S. Bureau of the Census and published in Annual Report on the Labor 
Force. State and county estimates were obtained by allocating a portion of the na- 
tional total to states, and in turn to groups of counties in the respective states, on 
the basis of data from the Censuses of Agriculture and Population. 

c Nonagricultural employment estimates for the Tennessee Valley, derived from the 
BLS state estimates, are based upon special tabulations of county data from the Bu- 
reau of Old-Age and Survivors Insurance, Census and Civil Service reports, and 
other related materials. 

help to bring about a more efficient agriculture through better farm 
organization, land use, and farm enlargement. 



AGRICULTURE AND ECONOMIC GROWTH 



National economic growth, which has served to create additional 
nonfarm job opportunities, in combination with increased production 
efficiency in agriculture, has provided the incentives for increased 



322 



ARTHUR B. MACKIE 



OCCUPATIONAL 
GROUP 



Professional and 
Technical 

Skilled 

(Plus Prop, a Mgrs.) 

Semi-Skilled 
(Plus Clerical 8 
Sales) 

Unskilled 
(Plus Service) 



Increase, 1940-50 
Decrease, 1940-50 



Unemployed 
Farming 




16 8 

Percent Civilian Labor Force 



24 



Source: 1950 Census of Population, General Characteristics. 

Fig. 22.1. U. S. labor force becoming more skilled. 



labor mobility, especially among the young adult farm population. Also, 
underemployment of labor in agriculture and the incentives for making 
production and income adjustments have generally been an outgrowth of 
economic and technological progress (cf. Chapters 6, 7, and 14). The 
extent to which workers will be employed by 1975 was indicated by 
Baum and Bachman. 

The nature and extent of underemployment of human resources are 
related to the changing structure of agriculture and to the relative 
speed with which different regions in the United States make the neces- 
sary adjustments in farm technology and resource use. Rapid national 
economic growth and technological progress in agriculture have ac- 
centuated underemployment and low income in the Southeast because 
many individuals are not prepared to make the necessary changes in 
their farm production or type of employment. Woodworth and Fanning 
(Chapter 23) and Hendrix and Lanham (Chapter 14) make similar ob- 
servations. There are many barriers which inhibit or prevent many 
individuals from making the necessary production and income adjust- 
ments in agriculture and outside agriculture. Migration data and the 
rate of nonfarm job creation yield some insight about the type of ad- 
justments being made with respect to changes in human resource use, 
but these data tell us little about the extent to which additional adjust- 
ments will be needed. 

An examination of the agricultural census data on farms by 



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324 



ARTHUR B. MACKIE 



Increase, 1940-50 



OCCUPATIONAL 
GROUP 



Professional and 
Technical 

Skilled 

(Plus Prop. 8 Mgrs) 

Semi-Skilled 
(Plus Clerical 8 
Sales) 

Unskilled 
(Plus Service) 

Unemployed 



Farming 











1 Decrease, 1940-50 










1 




"w 












p 




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■ 


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32 



24 



16 8 8 

Percent Civilian Labor Force 
Source: 1950 Census of Population, General Characteristics. 

Fig. 22.2. Farm employment declines in Southeast. 



24 



economic class gives some additional knowledge of the relationship of 
agriculture to economic growth, and of the nature of adjustment prob- 
lems in agriculture resulting from further improvements in agricul- 
tural technology. From 1930 through 1954 the number of all commer- 
cial farms and each individual grouping of commercial farms, except 
for Economic Class I farms which increased from 1950-1954, declined 
in absolute terms. The most drastic decline in the number of farms 
was in the low-income small-scale commercial farms. As farm pro- 
duction technology and efficiency continue to increase, these low- 
income farmers, as well as most rural farm youth, will find it increas- 
ingly difficult to find productive employment in agriculture. However, 
rural people, especially those in the low-income group, generally have 
the least qualifications for entering the nonfarm labor force in terms 
of age, education, and vocational training. 8 Therefore, these people 
must enter the nonfarm labor force at the unskilled level where the de- 
mand for this type of labor is decreasing relative to other occupational 
groups. 9 In terms of their contribution to total economic growth and 
national income, these rural people will be able to make a limited con- 
tribution because of their lack of education and training. Additional 



8 Arthur B. Mackie and E. L. Baum, Problems and Suggested Programs for Low-Income 
Farmers, Div. of Agr. Rel., TVA Report T 60-2 AE, Oct., 1959. 

9 Ewan Clague, Testimony before Special Subcommittee on Unemployment Problems, 
United States Senate, Oct. 7, 1959. 



CAPITAL INVESTMENT IN HUMAN RESOURCES 325 

capital investment in human resources, both in basic education for the 
rural youth and in vocational training for all rural people entering the 
nonfarm labor force, would no doubt prove to be a profitable invest- 
ment for the nation. 



NEED FOR GREATER EMPHASIS ON INVESTMENT 
IN THE HUMAN AGENT 

The existence of low incomes, or underemployed labor resources, 
in agriculture and the changing demand structure for labor in the non- 
farm sector serve to emphasize the importance of achieving an "in- 
vestment balance" in capital allocated to material and human resource 
development. 10 Greater emphasis on investment in human resources is 
needed to overcome the historical concept — which is still predomi- 
nantly held — that only physical resource development and material 
capital are essential to technological progress and economic growth. 
Emphasis on the need for a greater investment in the human agent by 
the National Science Foundation, 11 U. S. Department of Labor, 12 Gal- 
braith, 13 Ginzberg, 14 and others, 15 has done much to bring about a better 
understanding of the need for and the relationship of capital investment 
in human resources to economic growth. 

The necessity for a greater emphasis on capital investment in hu- 
man resources grows out of (1) the need for obtaining a wider accept- 
ance of the idea that capital expenditure in human resource develop- 
ment is an investment which yields returns to society in terms of a 
more productive and competent labor force, and (2) the inability of the 
market system to allocate capital between physical and human resource 
development activities in a manner that is conducive to maximum eco- 
nomic growth. The first aspect of the problem involves a historical 
attitude that places more value or importance upon physical capital in- 
vestment — especially private — than upon investment in human re - 
sources. The second consideration grows out of the first, since 



10 John Kenneth Galbraith, The Affluent Society, Houghton Mifflin Company, Boston, Mass., 
1958, pp. 270-80. 

11 Scientific Manpower, 1958, op. cit. 

12 Occupational Outlook Handbook, op. cit. 

13 Galbraith, op. cit., pp. 270-80; see also an article by Galbraith, "Men and capital," 
The Saturday Evening Post, Mar. 5, 1960. 

14 Ginzberg, op. cit. 

15 A partial listing of the literature would include: Earl O. Heady, "Adaptation of extension 
education and auxiliary aids to the basic economic problem of agriculture," Jour. Farm Econ., 
Vol. 39, No. 1, Feb., 1957, pp. 112-27; USDA, Development of Agriculture's Human Resources 
— A Report on Problems of Low-Income Farmers, Washington, April, 1955; Arthur Moore, 
"Underemployment in American agriculture, a problem in economic development," Nat. Plan- 
ning Assn. Pamphlet No. 77, Jan., 1952; Theodore W. Schultz, "Reflections on poverty within 
agriculture," Jour. Polit. Econ., Vol. 58, Feb., 1950; E. L. Baum and Earl O. Heady, "Some 
effects of selected policy programs on agricultural labor mobility in the South," The Southern 
Econ. Jour., Vol. 25, Jan., 1959; C. E. Bishop, "The mobility of farm labor," Policy for Com- 
mercial Agriculture — Relation to Economic Growth and Stability, Joint Economic Committee 
Report of the Subcommittee on Agricultural Policy, 85th Cong., 1st Sess., Washington, 1957. 



326 ARTHUR B. MACKIE 

investment in human resources does not command a direct market 
price. Therefore, such investment must be made outside the market 
system through the expenditure of public funds. Since capital invest- 
ment in human resources is left to the area of public domain, there are 
few, if any, effective criteria for channeling adequate quantities of cap- 
ital into human resource development. There is important need for a 
realistic accounting system that would clearly define the costs and 
gains from additional investment in education, i.e., a national balance 
sheet. 

Historically, the United States has recognized the importance of 
education in developing an enlightened citizenry to better perform their 
civic and political responsibilities. However, the economic importance 
of education has not been fully recognized or related to economic bene- 
fits. Part of the explanation for the slowness of our society to appraise 
adequately the value of education and training, and to relate such bene- 
fits to national manpower problems and needs, has been our preoccupa- 
tion with the assumption that adequate investment in education would be 
taken care of by the free market system. The free market system has 
not prevented the malutilization of the nation's human resources. In 
fact, it often has encouraged malutilization through discrimination and 
the creation of an imbalance in rewards between the profit (business) 
and nonprofit (public) sectors of our economy. 

Although all signs point to an ever-increasing dependence of our 
economy on people with high orders of skills and competence, the pub- 
lic has been very slow to increase the share of our national income de- 
voted to education. Inadequate investment in the educational prepara- 
tion of Americans is not limited to illiteracy, which is an extreme 
example of neglect. Rather, it more nearly lies in the unwillingness of 
a large portion of our population to provide adequately primary and 
secondary education for the youth, especially in the Southeast. The 
significance of an inadequate investment in educational preparation of 
youths is dramatized by the rejection rates of registrants given mental 
tests by the Selective Service System from 1951 to 1958. 16 During 
1953-54 one-third of all young men screened for military service were 
placed in Mental Groups IV or V, which means that because of their 
low intellectual achievement they were either rejected for service (V) 
or found unacceptable for advanced training (IV). Only 23 percent of 
the males from the western states were in these two lowest classes, 
while almost 53 percent of the selectees from the southeastern states 
were so classified. 17 These figures suggest that not only does the 
South have fewer high school graduates, but the quality of their school- 
ing is inferior to other parts of the nation. The data on the expenditure 
per pupil for secondary and primary education by states suggest that 
the low level of such investments in the southern states is not entirely 



18 Lee R. Martin, "Investment in human resources: a solution to the low-income problem, 
Unemployment Problems, Hearings Before Special Committee on Unemployment Problems, 
United States Senate, 86th Cong., 1st Sess., 1960, Part 5, p. 2186, Table 6. 

17 Ginzberg, op. cit,, p. 57. 



CAPITAL INVESTMENT IN HUMAN RESOURCES 327 

unrelated to the educational achievement and performance of youths in 
military service or in civilian employment. 18 Martin presented data on 
this subject in Chapter 4, Table 4.1. 

The importance of education and its manpower implications is es- 
sentially twofold: (1) individuals acquire skills by building upon what 
they learn in school and environment; and (2) society and industry can 
make additional investments in individuals in the form of additional 
training, and hence, skills, if the initial investment in basic education 
has been made. The returns on the initial investment in primary and 
secondary education are not limited to the immediate income earned, 
but to the fact that secondary and higher order investments can be 
made by industry or society in additional training. The possibility of 
additional training means an expansion of the lifetime income oppor- 
tunities for an individual. This additional investment opportunity 
means that industry can alter the make-up of its labor force to meet 
its changing demand for skills which results from technological ad- 
vances and economic growth. In addition, a third benefit accrues to 
communities that have made adequate investment in primary and sec- 
ondary education because business will be more easily attracted to the 
areas that have a well-educated labor force. One of the present diffi- 
culties encountered by many communities in the South in attracting in- 
dustries is the low level of education of their labor force. Not all in- 
dustries seek out surplus labor areas because of low wages; rather, 
low cost labor considerations may be incidental to labor productivity 
considerations. 19 



EDUCATION: AN ESSENTIAL REQUISITE FOR 
SUCCESS IN AGRICULTURE 

The benefits of additional education are not limited to the nonfarm 
sectors. Agriculture, like other industries, is becoming more scien- 
tifically oriented, and is thus demanding greater competence of its 
labor force. The demands for an efficient farm organization, and all 
that this implies for increased technology, increased capital needs, and 
improved management to command and utilize land, labor, and capital 
resources, will continue to increase in importance. The implication of 
these factors is that agriculture is becoming more complex and 
business-oriented. As agriculture becomes more business-oriented, 
the manner in which capital, land, and labor are utilized and managed 
will materially affect the ability of individual farm firms to remain 
competitive. In this economic environment, education of farm opera- 
tors will become increasingly important as a limiting factor in achiev- 
ing desirable living standards. The relationship of educational attain- 
ment to income of farm operators in 1950 is clearly indicated by the 



18 Martin, op. cit., p. 2172. 
19 Ibid. 



328 ARTHUR B. MACKIE 

higher proportion of farmers in Economic Classes I and II who had 
graduated from high school than was true for lower income farmers 
(Table 22.3). Obviously then, with continuous national and regional 
economic growth, education will become an important factor governing 
the future success of individuals remaining in agriculture, or those 
leaving agriculture for nonfarm work. The implication of a low level 
of educational attainment for low-income commercial farmers — those 
who are being forced out of agriculture — is that these rural people will 
continue to experience great difficulty in competing for nonfarm jobs. 
Furthermore, education will become increasingly important to rural 
youths since the educational level and skills of the total labor force 
continue to rise. For example, in 1957, 38 percent of the people 25 to 
34 years of age had completed high school, while only 14 percent of 
those who were 55 years of age and over had this much schooling. 
Two -thirds of the population 18 years of age in 1958 had completed 
high school, whereas only about 1 out of 15 in 1900 had done so. 20 Many 
factors have contributed to this rising educational level. One impor- 
tant factor has been the increasing complexity of skills demanded in 
modern industry. To meet such requirements, employers have raised 

Table 22.3. Years of School Completed by Farm Operators by Economic Class 
of Farms for the United States, 1950 a 





Total 
all 




Commercial farms b 




Total 


Part-time 


completed 


farms 


I and II 


ni 


IV 


V 


VI 


farms 


residential 










(percent distribution) 








100.0 


100.0 


100.0 


100.0 


100.0 


100.0 


100.0 


100.0 


None 


2.7 


0.4 


0.8 


2.0 


3.0 


5.9 


2.6 


3.0 


Elementary: 


66.4 


42.8 


59.1 


66.9 


72.2 


78.5 


65.7 


68.0 


1 to 4 years 


14.9 


4.0 


5.5 


10.3 


19.0 


27.3 


13.9 


17.3 


5 to 6 years 


13.8 


5.6 


8.2 


12.7 


16.1 


17.9 


12.7 


16.3 


7 years 


10.8 


7.4 


8.8 


10.5 


11.5 


13.3 


10.5 


11.6 


8 years 


26.9 


25.8 


36.6 


33.4 


25.6 


20.0 


28.6 


22.8 


High school: 


25.3 


42.7 


33.3 


26.5 


20.5 


14.1 


26.1 


23.4 


1 to 3 years 


14.3 


16.4 


16.0 


15.5 


12.6 


10.7 


14.1 


14.9 


4 years 


11.0 


26.3 


17.3 


11.0 


7.9 


3.4 


12.0 


8.5 


College: 


5J5 


14.1 


6.8 


4.6 


4.3 


1.5 


5J5 


5J5 


1 to 3 years 


3.6 


9.4 


5.1 


3.0 


2.8 


0.9 


3.8 


3.2 


4 years or more 


2.0 


4.7 


1.7 


1.6 


1.5 


0.6 


1.8 


2.4 



Farms and Farm People— A special cooperative study by the U. S. Depts. of Com. and Agr., 
Bureaus of the Census and Agricultural Economics, Washington, D. C, 1953, p. 59. 
'Commercial farms were classified by the 
classes in accordance with value of sales: 



Economic class 


Value of sales 


I 


$25,000 or more 


II 


10,000 to 24,999 


in 


5,000 to 9,999 


IV 


2,500 to 4,999 


V 


1,200 to 2,499 


VI 


250 to 1,199 



'Occupational Outlook Handbook, op. cit., p. 13. 



CAPITAL INVESTMENT IN HUMAN RESOURCES 



329 






the educational qualifications for many jobs, especially for the more 
skilled occupations. The importance of increased educational require- 
ments for the more skilled jobs is reflected in the data presented in 
Table 22.4 on educational attainment by occupational employment for 
those individuals working in 1959. These data indicate that the impor- 
tance of education should continue to increase for rural farm youths 
seeking nonfarm employment opportunities. 

The discussion thus far suggests the following means to improve 
incomes and investment in those human resources remaining in or 
leaving agriculture: (1) expansion of existing basic educational pro- 
grams; (2) improvement of existing educational programs to include 
more vocational training and guidance, and other related services for 
the young and adult farm population leaving agriculture; (3) improved 
agricultural education programs for the adult farm population remain- 
ing in agriculture; (4) reallocation of present funds among existing 
program activities in line with changing demand for labor and employ- 
ment opportunities; or (5) combinations of the above methods. 



OPPORTUNITIES FOR INVESTMENT 

Generally, the essential features of a desirable national education 
program exist, but a critical review of our current programs with re- 
spect to objectives and needs should be undertaken to provide the basis 
for making the necessary adjustments and improvements in educational 
programs to meet existing and future production and manpower needs. 

An expansion of existing educational, training, and service pro- 
grams would involve a change in attitude on the part of society toward 
public expenditures (investments) before additional funds can be ob- 
tained. The belief that public expenditure for education is a consumption 



Table 22.4. Educational Attainment by Occupation Group 
for Those Employed in the United States in 1959 





Educational attainment levels 






Average years 




Percent with 






Less than 


High school 


Some 


Occupational group 


completed 


high school 


graduation 


college 


Professional and technical 


16.2 


6 


19 


75 


Proprietors and managers 


12.4 


38 


33 


29 


Clerical and sales 


12.5 


25 


53 


22 


Skilled 


11.0 


59 


33 


8 


Semi-skilled 


9.9 


70 


26 


4 


Service 


9.7 


69 


25 


6 


Unskilled 


8.6 


80 


17 


3 


Farmers and farmworkers 


8.6 


76 


19 


5 



Source: Manpower Challenge of the 1960's, U. S. Dept. of Labor, U. S. Govt. Print. 
Off., 1960. 



330 ARTHUR B. MACKIE 

item will have to be replaced by a recognition of it as an investment 
item. Also, the belief that sufficient funds for development of human 
resources can be obtained through the market system will have to be 
replaced with a recognition that such capital investments are in the 
area of the public domain, and therefore, need separate investment 
criteria. 

One of the reasons why this nation is faced with an inadequate in- 
vestment in human resources resulting from outdated concepts has been 
the lack of sufficient research on the economic impacts of education on 
the nation. More research has probably been done on the benefits of 
education to the individual than on the total economic return to the na- 
tion in terms of its effect upon total national income. The effects of 
education upon labor mobility in agriculture have been pointed out 21 as 
well as the effect of education on income level, 22 or income potential 
for all individuals. 23 The lifetime earnings, for example, for a 25- 
year-old college graduate have been roughly estimated to be about 
$260,000, as compared with $155,000 for a high school graduate, and 
only $110,000 for those who have completed the eighth grade (Figure 
22. S). 24 There is a need for more research on this subject so that an 
adequate assessment can be made of the possible total effects of in- 
creasing the educational level in the South on national income and eco- 
nomic growth. For example, the proportion of the population, ages 25 
to 29 in 1950, that had completed high school was 35 percent for the 
United States, while only 25 percent or less had completed high school 
in each of the southern regions (Table 22.5). The low percentage of 
people completing high school in the southern region is not entirely due 
to the low percentage associated with the nonwhite population. The 
proportion of the white population graduating from high school in the 
South is consistently lower than for all other regions in the United 
States (37 percent for the United States and 28 percent or less for the 
southern regions). Increasing the educational attainment of the south- 
ern population would improve the quality of the labor force and affect 
regional economic growth. Such an effort would not only raise the in- 
come level of individuals in the South, but it would also enable under- 
employed labor resources to make a greater contribution to our total 
national product. 

Another aspect of a long-run investment in human resources, such 
as education, is related to the relationship of basic education to 



21 USDA, Farm Population - Migration To and From Farms, 1920-1954, USDA, AMS-10, 
Dec, 1954; Gladys K. Bowles, "Farm population net migration from rural farm population, 
1940-50," USDA, AMS, Stat. Bui. No. 176, June, 1956; C. Horace Hamilton, "Educational 
selectivity of rural-urban migration: preliminary results of a North Carolina study," Se- 
lected Studies of Migration Since World War II, New York: Milbank Memorial Fund, 1957 
Annual Conf. Proc, pp. 110-22; also see fn. 15, this chapter. 

22 Herman P. Miller, Income of the American People, John Wiley & Sons, Inc., New York, 
1955, p. 54, Table 25. 

23 Stuart Garfenkle, "Work-life patterns and educational levels," Occupational Outlook 
Quarterly, Vol. 2, No. 4, Dec, 1958, pp. 16-18. 

24 Ibid., p. 16. 



CAPITAL INVESTMENT IN HUMAN RESOURCES 



331 



AVERAGE ANNUAL INCOME OF MEN IN 1956, 
1,000 DOLLARS BY YEARS OF SCHOOL COMPLETED AND AGE 



10 



College Graduation 



N^ 



High School Graduation 
or Some College . 

■ X X X X X X X X 



i Elementary School 
or Some High School 



25-34 



35-44 



45-54 



55-64 



AGE 



Source: U. S. Bureau of the Census, U. S. Dept. of Labor, BLS. 

Fig. 22.3. Education is one of the factors affecting income. 

subsequent training of individuals to acquire new or additional skills 
and competence. This built-in flexibility of the labor force enables in- 
dustry to make short-run investments in training programs for indi- 
viduals when technological advances alter the labor requirements of 
industry. Thus, the ability to alter specialized skills of our labor force 
to meet short-run changes in the demand for labor is directly related 
to the initial investments in human resources. 

The need for a greater investment in human resources is being 
recognized by private industry. Many large corporations are initiating 
"continuing educational programs" for their personnel to improve the 
competence and skills of their labor force to meet the particular de- 
mands brought about by technological change. The need for this type of 
investment grew out of practical necessity for meeting current indus- 
trial demands for particular skills and for meeting future manpower 
needs that emerge from continuous technological progress and entrance 
of new workers into the labor force. 

Another opportunity for increasing the investment in human re- 
sources is the improvement of existing educational programs by ex- 
panding certain program activities, such as vocational guidance and 
training, while leaving other activities, such as vocational agriculture, 
at their present levels. Still another possibility would be a reallocation 



332 ARTHUR B. MACKIE 

of funds, i.e., reducing expenditures for vocational agriculture and in- 
creasing expenditures for program activities such as "vocational trade 
and industry" and "vocational distributive occupations" training for the 
young adult population. In addition to similar vocational training and 
guidance programs for the rural adult population, other programs 
could be expanded, such as extended employment services unemploy- 
ment compensation benefits, outlook services to better inform farm 
people about both farm and nonfarm income opportunities, and improved 
agricultural education programs for scientifically-minded farmers as 
well as low-income farmers. 25 

The above suggestions should lead to an improved investment in 
human resources and would, in effect, bring our educational and train- 
ing efforts in line with needs and demands. In fact, the demand for vo- 
cational agricultural training has decreased more in the southern states 
than it has for the nation. 26 The proportion of farm youths of the male 
farm population in 1950 enrolled in vocational agriculture classes in 
twelve southern states was only 35 percent, while 41 percent were so 
enrolled for the United States in 1950. The fact that a smaller propor- 
tion of farm youths enrolled in vocational agriculture classes in the 
South than elsewhere, considering the preponderance of farming in the 
South, could mean that these youths have recognized the limited oppor- 
tunities in agriculture to a greater extent than have our educational 
policymakers. In fact, many of the educational studies have assumed 
that vocational training for full-time agricultural occupations should be 
expanded. Insufficient thought has been given to (1) the limited oppor- 
tunities for employment in agriculture, and (2) the relationship of agri- 
cultural employment to continued economic growth and improved farm 
technology. 27 

Trends toward the need for even fewer human resources in agri- 
culture would signal the need for a reallocation of the federal and state 
expenditures (as shown in Table 22.6) between vocational agriculture 
and vocational trade and industry training. Specifically, the funds for 
vocational agriculture and home economics probably should be reduced 
and reallocated to vocational trade and industry and vocational distribu- 
tive occupational training. These data indicate that a critical review of 
our present manner of investment in human resource development 
should be undertaken and adjustments made in the use of current public 
funds before attempts toward improvement by additional funds are ex- 
plored. 

The slowness of our nation to fully appraise the benefits of making 
additional investments in human resources is closely related to histor- 
ical concepts and attitudes concerning the role of education. In the 
past our economic system was less complex and technical, and 



25 For a more detailed discussion on these points, see: Heady, op. cit., pp. 119-27; 
Baum and Heady, op. cit.; Mackie and Baum, op. cit. 

26 USDA, Development of Agriculture's Human Resources — A Report on Problems of 
Low-Income Farmers, op. cit., pp. 34-37. 

^USDA, ibid., p. 34. 



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334 



ARTHUR B. MACKIE 



Table 22.6. Expenditures for Vocational Training for the United States 
and Low-Income Southern States, Fiscal Year Ending June 30, 1953 











Vocational 










Trades 






Total 


Federal 




Home 


and 


Distributive 


State 


expenditures 


expenditures 


Agriculture 


economics 


industry 


occupations 




($1000) 


(percent) 


(percent) 


(percent) 


(percent) 


(percent) 


Total United States 


145,951 


17.4 


32.5 


29.5 


34.6 


3.3 


Total Low -income 














southern states 


39,864 


18.5 


45.3 


34.7 


17.2 


2.8 


Alabama 


3,101 


21.6 


42.8 


30.4 


24.0 


2.8 


Arkansas 


2,705 


18.2 


47.7 


39.0 


10.7 


2.5 


Georgia 


5,052 


14.3 


45.9 


39.6 


11.7 


2.8 


Kentucky 


2,190 


31.1 


47.0 


33.3 


17.5 


2.2 


Louisiana 


3,748 


13.1 


45.3 


37.9 


14.0 


2.9 


Mississippi 


2,900 


21.2 


49.5 


34.9 


13.7 


1.9 


Missouri 


3,145 


22.1 


36.5 


32.5 


26.0 


5.0 


North Carolina 


5,278 


18.2 


51.6 


35.4 


10.7 


2.3 


Oklahoma 


3,612 


12.2 


50.9 


27.8 


18.1 


3.2 


South Carolina 


2,895 


17.0 


45.7 


34.2 


17.4 


2.6 


Tennessee 


3,536 


20.2 


39.9 


36.0 


21.7 


2.3 


West Virginia 


1,702 


24.3 


31.1 


29.9 


36.4 


2.5 



Source: Digest of Annual Reports of State Boards for Vocational Education to the Office of Education, 
Division of Vocational Education, U. S. Dept. of Health, Education, and Welfare, June 30, 1953. 



therefore, placed less emphasis on education than is true today. The 
importance of education in a society of increasing complexity cannot be 
overemphasized. In order to help bring about a rapid and more com- 
plete recognition of the importance of increasing our investment in hu- 
man resources, greater research efforts will have to be undertaken. 
There is a real need for a greater research effort to develop appropri- 
ate investment criteria for human resource development and to provide 
more information on the basic relationships between physical and hu- 
man resource development and economic growth. The need for a 
greater investment in human resources may become more important in 
the future than physical resource development since the extent to which 
the latter can be accomplished may depend upon the skills and imagina- 
tion developed through investments in human resources. The results 
from such research efforts are needed to provide the basis for chang- 
ing society's attitude toward investments in human resources, as well 
as criteria for increasing capital investment through program im- 
provements. 



Discussion 



THOMAS J. WHATLEY* 

Mackie gives top priority to a larger allocation of our national 
wealth toward a formal educational program which will provide an op- 
portunity for the farm or rural youth of America at least to complete 
high school. Data presented indicate a positive relationship between 
formal educational attainment of individuals and their earning power. 
It is generally recognized that our formal educational system provides 
basic training upon which further specialized skills can be developed 
through in-service training in different occupations. 

The Southeast is characterized as a region with low expenditures 
per pupil for secondary and primary education. Mackie indicates that 
during 1953-54 almost 53 percent of the young men screened for mili- 
tary service in the Southeast were either rejected for service or were 
found unacceptable for advanced training because of their low intellec- 
tual achievement. If additional capital investments in formal education 
will prepare the youth of the region with greater skills for agricultural, 
industrial, and governmental pursuits, why has education not received 
more emphasis? Perhaps the reasons are manifold. For example, an 
examination of the data presented in Chapter 22 shows that 45 percent 
of those employed in the Southeast were engaged in agriculture in 1940. 
This means that a large share of the burden of rearing and educating 
children now entering our labor force rests on a segment of the econ- 
omy in the Southeast where capital resources are limited and incomes 
are low. As late as 1959, the average net cash farm income per farm 
in Tennessee was only $1,504. 1 Long and Dorner estimated in 1949 
that the average contribution toward rearing and educating farm chil- 
dren up to the age of 15 years by a farm family in Tennessee having 
less than $1,250 annual net income was $3,134. 2 The capital resources 
invested in rearing and educating two children amounted to approxi- 
mately one-half the total investment available on an average Tennessee 
farm. It is easy to see why the farm sector in the Southeast has been 
faced with a definite limitation on its contribution toward education, 
especially since 1930 or 1940. 

Elective administrative officials have found themselves in some- 
what of a dilemma in trying to allocate scarce tax dollars among edu- 
cation, other public services, and physical resource development in 
areas where outmigration has been the highest — such as many areas of 
the Southeast In order to keep or attract people and/or industries to 



*Head, Department of Agricultural Economics, University of Tennessee, 
^he Farm Income Situation, AMS, USDA, Washington, D.C., Feb., 1960, p. 21. 
2 E. J. Long and P. Dorner, "Excess farm population and the loss of agricultural capital, 
Land Econ., Vol. 30, Nov., 1954, pp. 363-68. 

335 



336 ARTHUR B. MACKIE 

communities, it is essential to provide roads, libraries, sanitation and 
recreational facilities, and many other services found in other areas 
where alternative employment opportunities exist. These items are 
often provided in lieu of increased investments in education. From a 
national viewpoint, the marginal productivity of these tax dollars may 
be higher if invested in education; however, from the standpoint of local 
groups providing the tax dollars and faced with area stagnation, the al- 
ternative uses for capital may result in less emphasis on education. 
Therefore, there is a definite need for further studies on ways to 
strengthen our formal educational program. 

Vocational training and guidance programs should also be expanded 
to implement the movement of surplus young adults out of agriculture. 
Many of us are prone to look at our current farm population and state 
that we are faced with a tremendous job in shifting perhaps 50 percent 
or more of our current farm operators out of agriculture into industry, 
especially in the Southeast region. Henderson found in a study of ad- 
justment potentials of 506 rural households in 8 counties in upper east 
Tennessee that 59 percent of the household heads were limited, due to 
age, physical handicap, or other similar factors, as to the adjustment 
they could make either in agriculture or toward industrial employ- 
ment. 

Improved agricultural education programs must be provided for the 
adult farm population remaining in agriculture if our resources are to 
be used wisely and efficiently. Such programs must place emphasis on 
developing and blending the proper mixture of managerial know-how, 
labor with acquired skills, land, and other forms of capital into a com- 
plex business-oriented agriculture. The problem of keeping the proper 
mixture of resources yielding high incomes is difficult even in highly 
commercialized agriculture, but is compounded many times in areas 
such as the Southeast where many skills are undeveloped and physical 
resources are limited on existing farms. 

More consideration should be given by both borrowers and lenders 
of capital to the returns which it will produce when mixed with other 
resources in a farming system. Agricultural education programs 
should provide farm operators with tools for decision-making, such as 
how to evaluate alternative farm enterprises and how these enterprises 
can be incorporated into alternative farming systems which maximize 
income and satisfaction. Technical assistance through expanded out- 
look information and farm and home planning by the Agricultural Ex- 
tension Service plus the services furnished by the Production Credit 
Associations, Farmers Home Administration, agricultural bank repre- 
sentatives, professional farm management organizations, and other 
private and governmental agencies can be used to develop the human 
resources in agriculture. 



3 H. A. Henderson, Resources and Incomes of Rural Upper East Tennessee People, Tenn. 
Agr. Exp. Sta. Bui. 312, Mar., 1960. 



Chapter 23 

ROGER C. WOODWORTH 
J. W. FANNING 

University of Georgia 



Relationships Between 
Capital and Education 



AGRICULTURAL AND OTHER INDUSTRIES are developing and 
adopting innovations at a faster pace than ever before (cf. Chap- 
ters 1, 6, and 7). The process of adoption generally involves 
such steps as awareness, obtaining information, trial, and evaluation. 
In this process the farmer adopts a fraction of the total stock of inno- 
vations which can be expected to benefit him. Typically, he adopts only 
those innovations which reduce average, or per unit, costs. 1 These in- 
novations may (1) increase output without proportionately increasing 
the quantity of each resource, such as in the case of hybrid corn; 

(2) substitute one resource for a scarce or expensive one, such as 
when machinery replaces labor; or (3) save one resource without ma- 
terially changing use of other inputs or increasing yields; and (4) re- 
duce risk and/or uncertainty. The aggregate effect of innovations has 
been to (1) reduce substantially the amount of labor needed in agricul- 
ture; (2) minimize the danger of land seriously limiting the production 
of sufficient food and fiber for our population for several decades; and 

(3) increase substantially capital requirements per farm. Data illus- 
trating changes in capital requirements and use are presented in Chap- 
ters 1, 6, and 7. 

While some innovations directly increase yield of agricultural 
products, the majority of other types are likely to increase total prod- 
uct supplies indirectly unless the resources saved are retired from 
agricultural production. Since a small increase in total supply causes 
a relatively large drop in price for most agricultural products, agri- 
cultural prices thus decline, giving society in general and consumers 
in particular the major benefit of an innovation. 

Within agriculture the major income beneficiaries are those farm- 
ers who adopt the practice prior to general use and before the resulting 
increase in output and price decline. In this sense, nonadopters are 
likely to face lower farm incomes during the initial period of innovation 
adoption by other farmers. For example, the farmers in the Southeast 
who do not use any fertilizer would be able to obtain higher incomes if 
all farmers did not use fertilizer. 

While the steady development and adoption of innovations benefit 



1 Costs are defined broadly to include monetary and nonmonetary items. 

337 



338 ROGER C. WOODWORTH AND J. W. FANNING 

society and make possible increases in economic growth, it also causes 
hardships for many farm families. Generally, those farmers with inad- 
equate education, capital, or managerial abilities — or having a high 
aversion to risk or use of credit — are the ones who receive lower farm 
incomes. Discussions related to this point may be found in Chapters 4, 
14, 21, and 22. 

In addition to differential income effects on different groups of 
farms in the same area, different regions may also gain or lose from 
rapid technological progress. For example, the introduction of mecha- 
nization for cotton production has been more easily adopted by farmers 
in the Southwest than in the Southeast. Hence, farmers in the Southeast 
have been made comparatively, or even absolutely, worse off in income 
position. Perhaps the Southeast is also at a disadvantage because of 
the large number of farmers with inadequate resources and education 
to adopt readily new technologies in competition with other areas hav- 
ing fewer farmers with these handicaps. 



ROLE OF EDUCATION IN DEVELOPING A DESIRABLE 
ENVIRONMENT FOR CAPITAL GROWTH 

Numerous economists have indicated that physical quantities of 
land, labor, and capital are inadequate in explaining changes in agri- 
cultural output and development of agriculture. Schultz, referring to 
the decades of the 1930's, 1940's, and 1950's, indicated that increases 
in agricultural production have not been accompanied appreciably by 
increases in direct agricultural inputs. 2 Galbraith indicated that in- 
vestment in capital is still a prime measure of progress, but it is an 
increasingly inadequate one. 3 Mackie stressed in Chapter 22 that 
progress depends more on quality rather than quantity of the capital 
equipment in use, and on the intelligence and skill of those who use it. 
Martin emphasized this point in Chapter 4. 

If the failure to include quality of resources results in a limited 
insight and predictive ability concerning agricultural development, then 
it is appropriate to consider capital and credit problems within the 
broad framework of economic growth, as presented in Part I. If one 
considers quality of resources, including individuals, variables are in- 
troduced which are intangible and difficult or impossible to measure. 
One school of thought holds that since management cannot be defined, it 
is impossible to discuss this subject intelligently. The difficulty with 
this attitude is that it excludes from consideration many of the more 
important problems which confront us. Another school of thought holds 
that nothing can be done to guide or direct future adjustments in 



2 T. W. Schultz, Reflections on Agricultural Production, Output and Supply in Fertilizer 
Innovations and Resource Use, E. L. Baum, et aZ.(eds.), Iowa State University Press, Ames, 
Iowa, 1957. 

3 John Kenneth Galbraith, The Affluent Society, Houghton Mifflin Company, Boston, Mass. 
1958. 



CAPITAL AND EDUCATION 339 

agriculture and that one should leave things alone. This fatalistic atti- 
tude implies that man has no control over his economic affairs, and 
should also be discarded. 

Research and education over the years have been an important basis 
for economic and cultural development. It is the medium by which we 
attempt to develop and make full use of the intelligence and skills of 
individuals. Formal and informal education has had a great deal to do 
with changing basic attitudes concerning the degree to which we seek 
material advance, accept innovations, apply science to economic ends, 
and develop fundamental science. In short, it is one important force 
conditioning capital growth and development. Bohlen and Beal, Coutu 
and Lindsey, and Mackie have stressed this point in their discussions. 



Managerial Skill and Capital Growth 

Generally capital is timid. It flows when production outcomes are 
relatively well known. Except when there is a chance of a large profit, 
such as in exploration for oil, it does not flow when risks are high or 
when the probability of different outcomes is unknown. Capital does 
not flow freely where individuals or industries have limited experience 
in handling borrowed funds, or where managerial ability is low. 

Credit itself is not a limiting factor in the capital development of 
many farms in the Southeast. Banks and other credit agencies pre- 
dominantly have the resources to extend credit where it is justified in 
terms of reasonable expectations of safety. In fact, the federal govern- 
ment has taken the lead with the establishment of public credit agencies 
to insure that credit facilities of different types are available. More 
detailed discussions of public credit agencies may be found in Chapters 
11 and 17. While there are still problems in providing credit tailored 
to the needs of agriculture, the major difficulty is in improving mana- 
gerial proficiency and in changing attitudes so that more farmers are 
in a position to use credit. This point is developed more fully by 
Diesslin, Engberg, and Hopkin (Chapters 13, 15, and 16). 

The small-scale southeastern farmer of 1950 had few opportunities 
to develop managerial skills. He may have borrowed funds to pay for 
the farm. Yet, success was considered to be associated with repaying 
the loan as rapidly as possible, and not borrowing except in dire need. 
He was considered successful if he developed the technical skills re- 
quired to raise row crops and pay off his mortgage. 

Today, success is associated to a much greater extent with the ap- 
propriate handling of purchased inputs, a larger size of farm, and a 
larger stock of capital goods. Frequently this means continuous use of 
credit, not only for permanent improvements but for working capital as 
well. Frequently, it means a shift to unfamiliar livestock production 
systems if a satisfactory income is to be obtained. The ability of farm 
operators to respond to these rapidly changing economic conditions has 
been one of the major factors controlling agricultural development in 
the Southeast. 



340 ROGER C. WOODWORTH AND J. W. FANNING 

Mackie indicated that one of the factors influencing farmers , abili- 
ties to adjust to modern farming conditions is related to formal educa- 
tion deficiencies. It is likely that a large segment of the farmers with 
a fourth grade education or less have not developed powers of communi- 
cation and analysis sufficient to serve them adequately under modern 
conditions. A study by McArthur and Saunders emphasizes the extent 
of educational deficiencies in the Coastal Plain Area of Georgia. 4 The 
results of their survey, conducted in 1957, indicated that about one- 
third of all farm operators had a fourth grade education or less (Table 
23.1). For those farmers 55 years of age and over, 45 percent had a 
fourth grade education or less. The essential point is that we are still 
feeling the effects of educational decisions made by society and indi- 
viduals thirty and forty years ago. In an economic setting where abili- 
ties of individuals are becoming more and more important in terms of 
capital and general economic development, we need to remind ourselves 
that educational decisions being made today by both society and indi- 
viduals will affect the nation for several decades under conditions 
which will likely place greater economic necessity on increased indi- 
vidual development. A second point to consider is that many farmers 
have not had control over sufficient resources to develop skills in 
decision-making, risk-taking, and debt management necessary for suc- 
cessful farm operation under today's farming conditions. 



CREDIT AND EDUCATION FOR LOW-INCOME FARMERS 

The existence of a large group of farm families with incomes con- 
sidered less than desirable is not unique to agriculture. There are 
low- income families in both urban and rural areas. The problem is 

Table 23.1. Education of Farm Operators in the 
Coastal Plain Area of Georgia, 1957 



Years of formal education 



Age 



0-4 


5-8 


9 or more 


Total 




(percent of farms) 




13.9 


36.1 


50.0 


100.0 


31.0 


41.5 


27.5 


100.0 


45.4 


36.4 


18.2 


100.0 


33.9 


39.0 


27.1 


100.0 



Under 34 
35 to 54 
55 and over 
All farmers 

U. S. farm operators (1950) 17.6 51.5 30.9 100.0 

Source: McArthur and Saunders, Ga. Mimeo N. S. 74; and Farms and Farm 
People, U. S. Depts. of Commerce and Agriculture. 



4 W. C. McArthur and Fred B. Saunders, Resources and Incomes of Rural Families in 
the Coastal Plain Area of Georgia, Ga. Agr. Exp. Sta. (in cooperation with USDA), Mimeo- 
graph Series N. S. 74, April, 1959. 



CAPITAL AND EDUCATION 341 

important, regardless of whether it has a rural or urban setting, since 
(1) many of these individuals are contributing less to society than they 
might; (2) in many cases the children of these families are denied op- 
portunities to develop skills, and are generally handicapped in compet- 
ing with others who have greater opportunities for such development; 
(3) from a welfare standpoint, there is a general feeling that these peo- 
ple have been left stranded in our society; and (4) it is sometimes 
stated that this group could be a source of expanded markets for prod- 
ucts. This subject is of direct concern to the Southeast since the ma- 
jority of the low-income families of the nation are concentrated in the 
rural areas of the region. 

Society has a welfare obligation to these people. Given limited re- 
sources for solving the low-income problem, however, there may be a 
conflict between welfare and economic growth objectives. The first 
consideration of society should be to insure that the children of these 
families have the opportunities to develop skills and intellect that 
would enable them to compete successfully for jobs and income in non- 
agricultural sectors. Such public activities as improved education, 
4-H clubs, FFA, and vocational education are basic forces working to- 
ward minimizing the low-income problem in future generations. 

Considerable progress has been made in determining the charac- 
teristics of the low-income problem. Experience and research suggest 
that the solution is complex (cf. Chapter 14). Since the causes differ 
from case to case, the solution varies by individuals or groups of fam- 
ilies. For some, a single cause such as lack of capital, lack of educa- 
tion, social values, or health may be responsible. For many other 
families there is a complex set of causes. For example, a research 
study in northeast Texas 5 indicated that 77 percent of all farm families 
with incomes below $1,000 had a family head who was 65 years of age 
or over, had a physical handicap, was female, or had completed less 
than five grades of school. Largely as a result of nonfarm employment 
opportunities, there were few able-bodied workers under 45 years of 
age with high school education engaged in full-time farming in the area. 
While variations exist among areas, the same general conclusions ap- 
ply to much of the Southeast. 

Traditional education programs designed to increase the physical 
efficiency of agriculture cannot be expected to solve the low-income 
problem. In terms of bringing about changes in farm structure and 
production techniques, much higher returns per educational dollar can 
generally be obtained by working with the operator of a large commer- 
cial farm. In fact, greater progress in solving the low- income problem 
has probably been made by programs which have not been specifically 
designed for agriculture. Progress in improving formal education, the 
development of better roads, and the wide availability of television and 
radio have all helped to reduce the isolation of low- income farm 



5 John H. Southern and W. E. Hendrix, Incomes of Rural Families in Northeast Texas, 
Texas Agr. Exp. Sta. Bui. 940, 1959. 



342 ROGER C. WOODWORTH AND J. W. FANNING 

families from the general stream of economic and cultural activities. 
In spite of progress, much still has to be learned in terms of initiating 
successful action programs. Experience suggests that (1) the social 
cost of underdeveloped human resources is high, and (2) the problem 
does not disappear by ignoring it. 

Some of the low-income problems in rural areas can be alleviated 
through adjustments in farm organizations. This possibility exists 
for the farm operators who have potential managerial ability, but 
need stimulation and/or managerial, educational, and credit assist- 
ance. This group includes operators who have been successful but 
are now receiving low incomes because they have failed to make ad- 
justments in their farm operations as conditions have changed. It does 
not include that segment of low-income farmers who are severely 
handicapped by age, health, or deficiencies in education or ability. 
Also, it does not include those farm operators who after careful evalu- 
ation of the circumstances decide that they would be better off with 
nonfarm jobs. 

One possibility for the group of low- income farm families who 
are likely to remain in agriculture is the provision for intensive man- 
agement assistance. 6 It would appear that financial and managerial 
assistance for basic and long-term farm adjustments would provide 
limited returns for those with severe capital, managerial, and physi- 
cal handicaps. One would expect some improvement in the situation 
by attempting to provide managerial and credit assistance for adjust- 
ments in the farm organization which are more of an intermediate or 
short-term nature. One example of this is the establishment of small 
manufacturing milk enterprises near a cheese plant in northwest 
Georgia. The plant furnished managerial assistance, and local banks 
have cooperated with credit. This development has made it possible 
for some low-income families with various degrees of handicaps to 
obtain credit, technical, and managerial assistance so as to gain 
somewhat in income status and in the development of skills. Hopkin 
developed a similar case for private banks to extend such assistance 
in Chapter 16. 

The Farmers Home Administration provides experience in help- 
ing small commercial farmers. Managerial assistance provided 
along with credit has made it possible to extend credit where it other- 
wise would have involved excessive risk. It is doubtful, however, that 
the program could be extended successfully to farms with greater 
handicaps. In Chapter 14, Hendrix and Lanham pointed out that for 
many of the lower-income families currently served, living expenses 
are too near income levels to provide much leeway for retiring debt 
obligations. 



6 A. B. Mackie and E. L. Baum, Problems and Suggested Programs for Low-Income 
Farmers, T 60-2 AE, TVA, Knoxville, Tenn., Oct., 1959. 



CAPITAL AND EDUCATION 343 

COORDINATION OF CREDIT AND EDUCATION 
FOR COMMERCIAL FARMERS 

Increased agricultural efficiency and regional agricultural develop- 
ment may also be fostered through greater coordination between edu- 
cational programs and credit institutions in agriculture. This possi- 
bility needs thorough examination. 

The need for tying technical assistance to credit is less vital for 
commercial farmers than for low-income farmers. Also, the type of 
coordination needs to be different. However, bankers in rural areas 
have far-reaching opportunities to be educators as well as dispensers 
of credit. Many rural bankers serve a very important function as ad- 
visers to farmers, particularly for broad aspects of management such 
as farm enlargement or enterprise changes. Many commercial banks 
are hiring agricultural agents or farm management specialists. This 
development is discussed by Shepardson and Hopkin (Chapters 16 and 
18). This is a promising method of extending credit in situations where 
limited management assistance is needed to insure safety of the funds. 
It can also be an important link for coordinating educational and credit 
assistance for intensive public educational programs such as Farm and 
Home Development and Rural Development. 

Education has an important role in bringing about changes in atti- 
tudes and institutions which limit capital development. For example, 
greater educational efforts are needed to encourage desirable leasing 
arrangements and eliminate the social stigma attached to renters. The 
development of more flexible leasing arrangements would be one way 
for farm operators to obtain control over additional capital or manage- 
ment (cf. Chapter 9). The possibility of obtaining capital and manage- 
ment for someone willing to share the risks could contribute to the 
capital structure of southeastern agriculture and provide a stronger 
base for extending larger quantities of credit. 

Educational programs for farmers have traditionally emphasized 
production know-how. Insufficient attention has been given to providing 
principles to improve decision-making abilities with respect to re- 
source allocation and use. Given a long-term objective of enhancing 
southern agriculture, it is extremely doubtful if educational resources 
spent in promoting a particular action by farmers can be nearly as ef- 
ficient as efforts to develop the managerial capacity of farmers. 



COMPLEMENTARITY BETWEEN EDUCATION AND CREDIT 

Education and capital can be considered to be technical comple- 
ments in agricultural production. Except within a narrow range, bene- 
fits cannot be obtained from one without increasing the other. In this 
sense, and if one thinks of an agriculture in the 1960's where substan- 
tially higher levels of capital are used per farm, then it follows that 
substantial improvements in managerial proficiency are also needed. 



344 ROGER C. WOODWORTH AND J. W. FANNING 

The adequacy of present educational programs and their coordina- 
tion with credit programs and needs should be considered. Our pro- 
pensity to adopt changes in institutions, programs, and laws is consid- 
erably lower than the propensity of farmers to adopt new biological or 
mechanical innovations. At any rate, changes in the organization, 
methods, and objectives of educational undertakings occur slowly. 

In the 1960's it will be necessary to "lead out* with new approaches 
in applied research and adult education for farmers. There will be 
fewer but better trained farm operators. Research and education of 
higher quality will be needed. 



Discussion 



PAUL L. HOLM* 

Woodworth and Fanning suggest that credit, or the lack thereof, has 
not been a limiting factor in the development of the Southeast, but that 
the main difficulty has been the level of managerial proficiency and the 
attitude of farmers toward the use of credit. They note that the small- 
scale southeastern farmer of 1950 had few opportunities to develop 
managerial skills. He did not borrow money except in dire need. 

I would add here that this was true of the small southeastern 
farmer not only in 1950 but also in 1960. One example is found in a 
study of farmers' attitudes toward credit which was conducted in a 
southeastern state in 1957. The results indicated that a small but sig- 
nificant proportion of farmers believe that borrowing money is an un- 
desirable practice. A number of respondents said they believed that 
sometimes, at least, borrowers were looked down upon by their neigh- 
bors. To many farmers, the act of getting a mortgage was the same as 
losing the farm. In addition, many farmers believed that a farmer who 
could get along without borrowing was a better manager than the man 
who did borrow. 

Another study pertinent to this area of financial management was 
conducted in South Carolina. The summary of the report on the study 
contained the following: "Inadequate education and training often re- 
strict managerial capacity which is reflected in pessimism and con- 
servatism toward technological change in agriculture. It also retards 
and restrains farmers from developing alternative uses for surplus 
agricultural resources, particularly labor. There is apparent need for 
broadening the base of training programs and expanding and improving 
the dissemination of information. The lack of adequate information and 



♦Agricultural Economist, Farm Economics Research Division, Agricultural Research 
Division, Agricultural Research Service, U.S. Department of Agriculture. 



DISCUSSION 345 

training in financial management appears to be especially acute. " 1 In 
order to overcome these deficiencies, increased emphasis needs to be 
placed on the kind of education that develops the individual's power to 
communicate and analyze situations, as opposed to the emphasis on 
specific techniques designed to improve a single operation. 

I doubt that anyone could disagree with the authors' statement that 
education is basic to progress toward a long-term solution of the low- 
income farm problem. However, more attention needs to be given to 
the subject matter and direction of such education. Perhaps the first 
objective of this kind of education is to acquaint the individuals involved 
with their level of economic activity relative to other segments of so- 
ciety and with the relevant alternatives available to them as individuals. 
The next objective, or perhaps a subheading of the first, is to insure 
that the individuals have the necessary powers of communication and 
tools of analysis to make an intelligent choice among the relevant and 
available courses of action. Successful accomplishment of the latter 
requires knowledge of the decision-making process and of the elements 
in the process that need to be emphasized in an educational program 
designed to facilitate the process. 

I find it inconsistent in our own society for anyone but the individual 
involved to make the final choice of his course of action. If, however, 
society in some way forces a decision upon the individual, it must 
stand ready to assist him in carrying it through to completion. It is 
here that education finds a final objective. This objective is to equip 
the individual in such a way that he can successfully accomplish the 
ends he has chosen or that may have been chosen for him. 



ROBERT A. PARR* 

Woodworth and Farming's statement that education, both formal and 
practical, to improve decision-making abilities, risk evaluations, and 
credit management, is of great importance. I propose that college re- 
search workers, in cooperation with commercial banks, farm credit 
banks and associations, and other farm credit agencies develop actual 
cases which could be written up, studied by students and adult farmers, 
then discussed and used as a tool to improve decision-making abilities 
and techniques. The effectiveness of case method studies has been 
demonstrated by several schools of business administration, and it is 
my opinion that there is a wealth of information which could be devel- 
oped on cases which were successful, as well as on cases which were 
not successful. Such cases should include resources, financial plans, 
marketing plans, profitability in relation to other alternatives, new en- 
terprises, adjustments, enlargements, and the like. It is my opinion 
that people in credit institutions would be willing to assist in leading 



Calvin C. Taylor and Thomas A. Barch, Personal and Environmental Obstacles to 
Production Adjustments on South Carolina Piedmont Area Farms, S. C. Agr. Exp. Sta. Bui. 
466, 1958, p. 33. 

♦President, Federal Intermediate Credit Bank of Columbia. 



346 ROGER C. WOODWORTH AND J. W. FANNING 

discussions with students and adult farmers under the case-method 
procedure, in addition to helping research workers develop cases 
which might be effectively used. 

Education plays a vital role in the following ways: 

1. In equipping individuals reared on farms to reach a decision as 
to whether to farm or pursue alternate opportunities in their best in- 
terest and thereby make a greater contribution to society. 

2. In evaluating opportunities to maximize profits through new en- 
terprises, adjustments, enlargement, or more efficient farm opera- 
tions. 

3. In the desire to seek borrowed capital, use it wisely, and de- 
velop sound long-range, as well as short-range, financial plans and ar- 
rangements. Too few farmers have good financial plans to present to 
their farm credit association or bank when they are requesting financ- 
ing of an expansion, new enterprise, or adjusted operation. 

4. In seeking to continue the learning process which is necessary 
to meet constantly changing conditions on the farm and in the economy. 

Lenders, as well as borrowers, will need to be smarter in the fu- 
ture. Another proposal I would like to make is to challenge the agri- 
cultural colleges to give some of their students more training of the 
kind necessary for graduates to have to advance rapidly as credit men 
and managers of lending organizations. We constantly experience the 
problem of finding men who have a good understanding of the concepts 
and techniques of credit, and men who can evaluate a farmer's ability 
to cope with all of the phases of modern farmingo We have a training 
program and are employing outstanding men, but I am of the opinion 
that they should be better equipped to assume leadership in farm credit 
business, and it would certainly be a contribution to them and to agri- 
culture. 



PART V 

Selected Research for Improving 
Use and Productivity of 
Capital and Credit 

► Utility and Decision Processes 

► Resource Productivity and Loan Limits 

► Effects on Use of Production Factors 

► Needed Research 



Chapter 24 

Decision Processes for 
Understanding Capital Use 
and Investment on Farms 1 



w. B. BACK 

Oklahoma State University 



VERNER G. HURT 

Mississippi State University 



AFTER SOME REFLECTION on the problem of improving capital 
use, particularly on low -production and low -income farms of the 
South, the authors concluded that most conceptions of the demand 
for capital by individual farmers are inadequate. The conceptual de- 
velopments in this chapter are intended to provide some logic of, and 
defense for, the following general propositions: (1) the explanation of 
capital rationing by an individual due solely to an aversion to risk aris- 
ing from imperfect knowledge may be misleading; 2 (2) demand for capi- 
tal by an individual farmer for investment in a production alternative is 
jointly determined by a number of dimensions of value; (3) potentially, 
capital rationing by individual farmers lessens as monetary relative to 
nonmonetary considerations increase in importance in individual valu- 
ations of production alternatives; and, (4) limited capital use by low- 
income farmers of the South is consistent with the presence of a com- 
plex of valuations other than monetary motives in individual appraisals 
of production alternatives. 3 Some elaboration of these propositions, to- 
gether with their policy implications, will follow development of the 
concept of value -space as it applies in individual valuation of production 
alternatives and decision processes. 4 

Utility and Decision Processes 

Catton made the concept of value -space central in a theory of value 
and of valuing. 5 The main idea he advanced is that objects of desire are 



1 Journal manuscript No. 557, Okla. Agr. Exp. Sta. The authors are indebted to E. J. R. 
Booth, Clark Edwards, and Odell Walker of Oklahoma State University, to E. N. Castle of 
Oregon State College, to John M. Brewster of ARS, USDA, and to John R. Franzmann of the 
TVA, for their constructive criticisms and suggestions. 

2 Capital rationing refers to the unwillingness of the individual to invest as much capital 
in a production alternative as monetarily profitable for him. 

3 An alternative hypothesis is that lending policies by credit institutions, or limited 
capital available to the farmers, is the cause of limited capital use by these farmers. Cf. 
W. E. Hendrix, "Availability of capital and production innovations on low-income farms," 
Jour. Farm Econ., Vol. 33, No. 1, Feb., 1951, pp. 66-74. 

4 The ideas presented in this chapter may be interpreted as the development of a general 
structure for explaining nonprofit maximization by individual farmers. 

5 William R. Catton, Jr., "A theory of value," Amer. Soc. Rev., Vol. 24, No. 3, June, 
1959, pp. 310-14. 

349 



350 W. B. BACK AND VERNER G. HURT 

valued by individuals in relation to many dimensions. For example, 
time is a dimension in that, ceteris paribus, individuals place a higher 
value on an object or income the nearer it is to the present. Also, geo- 
graphical distance is a dimension because an individual values an ob- 
ject differently as its distance from present location of the individual 
differs. Other dimensions of a value -space mentioned by Catton were 
social distance, permanence probability, and free selectability. 

Some of the dimensions of value identified by Catton may be inter- 
preted as means or costs in the acquisition of objects of desire. Ob- 
jects of desire may be interpreted as the consequences of actions. The 
value of an object of desire, or the consequences of actions per se, also 
must be represented by a dimension of a value -space. Catton did not 
suggest a scale or common measure of value on the n-dimensions of 
the value -space. Traditionally, in economics, money has been the in- 
dex or measuring rod for both means and consequences of actions. 
Since profit maximization was implied by this measure, economists 
have made increasing application of utility theory in their speculations 
about decision processes. 

The utility theory of economics underlying modern conceptions of 
demand dates back to the beginning of neoclassical economics. De- 
velopments in modern welfare economics, beginning with the utility 
theory in Hicks' Value and Capital, expanded the theory of utility appli- 
cable in individual decision processes. However, attention to problems 
of utility or values in models to explain production decisions did not 
arise until the recognition that lack of perfect knowledge made relevant 
value or utility rather than money profits. 6 

From a review of models of choice in economics, we draw the con- 
clusion that ends other than monetary income, such as security, are 
related functionally to uncertainty, and such ends become irrelevant in 
advent of perfect knowledge. 7 However, nonmonetary values independ- 
ent of uncertainty have received considerable discussion as having in- 
fluence on individual behavior. 8 If there are nonmonetary dimensions 
of value, independent of uncertainty, relevant in individual business de- 
cisions, one runs the risk of overemphasizing lack of knowledge when 
using the models of rational choice to explain these decisions. 

Another limitation of the models of choice, when applying the utility 
theory from consumption economics, is the under -emphasis on means. 
The orientation of these models is on the consequences of actions. If 
this evaluation of models of decision processes is correct, most of 



8 Statements in this chapter regarding the limitations of use of profit maximization as 
the sole end in economic analyses of individual farms are meant to apply mainly to low- 
production farms. Profit maximization may be a reasonable assumption in case of analysis 
of resource-use problems for high-income farmers. 

7 Cf . Gerhard Tintner, "A contribution to the non-static theory of production"; Oscar 
Lange, et al., Studies in Mathematical Economics and Econometrics, University of Chicago 
Press, Chicago, 111., 1941, pp. 92-109; and Albert G. Hart, Anticipations, Uncertainty and 
Dynamic Planning, Augustus M. Kelley, Inc., New York, 1951. 

8 Cf. John M. Brewster and Howard L. Parsons, "Can prices allocate resources in 
American agriculture," Jour. Farm Econ., Vol. 28, No. 4, Nov., 1946, pp. 938-60. 



CAPITAL USE AND INVESTMENT ON FARMS 351 

these models need a reorientation, and we suggest that the concept of 
value -space, developed with the use of the theory of utility, may pro- 
vide a way of emphasizing means and consequences in decision proc- 
esses realistically. 



Dimensions of Economic Value 

Value -space is multidimensional; the five dimensions we use to 
illustrate the multidimensionality of value -space for a production al- 
ternative are monetary income, degree of knowledge, time, effort, and 
capital requirements. Later illustrations are based on the following 
general functional forms: 

(1) U = U(tt,Z.), or, U = g(ir) + h(Z.) 

n 

(2) 7T = PyY - S P X (net monetary income) 

J J J 

(3) Y = f(X j , B lf Z 2 ,---,Z k ) 

where U is utility, ir is expected monetary returns above monetary 
costs (net monetary income), Y is expected physical output, the Xj's 
are expected quantities of the priced factors of production, and Zi's 
are nonpriced inputs, with k of these being functionally related to Y. 
In equation (1), the monetary and nonmonetary components of utility 
are separated. If h(Z^ = for all Z-, then: 

(4) U = g(ir) 

which means the economic value -space can be represented with a utility 
function for money. 

Money as a dimension of value -space is not new in decision models; 
also, as expressed earlier, degree of knowledge has received a central 
place in decision models. Although time, effort, and capital— as' non- 
priced factors— have received attention in economics, such attention 
has been small, or nil, in decision models. 9 These dimensions, with 
the assumption that monetary income is independent of other dimen- 
sions of the value -space, will be examined below. 10 Thus, the empha- 
sis will be on the nonmonetary dimensions. The relations to be dis- 
cussed may be expressed, functionally, as follows (with specific sym- 
bols for some of the Z { 's): 



9 For example, short-time horizons, leisure, asset position, desire for less uncertainty, 
etc., are discussed in the literature as possible explanations of inefficiency in resource use 
by individuals; however, conceptions of how these values, when considered simultaneously, 
fit in decision models do not exist. 

10 The assumption of independence of monetary income and the nonmonetary dimensions 
is made only for convenience. The actual situation may be expressed as follows: U( vr ; ^ ) 
= f ( 7T , Z;), where j *£ n. For example, receipt of income influences knowledge, or, one 
learns by experience. 



352 



W. B. BACK AND VERNER G. HURT 



(5) 
(6) 
(7) 
(8) 



h(T; E, C, K) = p(T, K) 
h(E; T, C, K) = q(E, K) 
h(C; E, T, K) = r(C, T, K) 
h(K; T, E, C) = s(K) 



where T = expected time of receipt of an expected 7r, E = expected ef- 
fort required, C = expected capital required, and K = degree of belief, 
or knowledge, in receiving the expected 7T. 11 These functions may or 
may not properly account for interdependence of the dimensions. The 
major interaction we discuss is knowledge with all other dimensions. 

The time dimension refers to a time preference in production or in 
the receipt of income, rather than in consumption, or in the expenditure 
of income. Although in economic literature these two kinds of time 
preferences are considered inseparable, time preference in production 
can be, and usually is, oriented toward the present regardless of the 
nature of time preference in consumption by an individual. This belief 
presupposes that future needs in consumption are uncertain. When con- 
sidering the function p(T; K) (with K at a fixed level), utility is as- 
sumed to decrease with an increase in time at an increasing rate (Fig- 
ure 24.1). However, if the time preference in consumption is oriented 
toward the present, as may well be the case for low-income farm fami- 
lies, then time preference in production must also be oriented toward 
the present. That is, time preference in production can be more ori- 
ented toward the present than time preference in consumption, but not 

-(U) 




(Time, Effort, etc.) 

Fig. 24.1. Hypothesized relation of dimensions of 
value-space and utility. 



11 Note that the variables are in terms of expectations by the individual. Expected value 
is interpreted as the arithmetic mean of a subjective probability distribution. Since these 
expectations are not single-valued, the knowledge dimension (K) relates to degree of risk or 
uncertainty. 



CAPITAL USE AND INVESTMENT ON FARMS 



353 




II (imperfect 
knowledge) 

I (perfect 
knowledge) 



Time 

Fig. 24.2. Effect of levels of knowledge upon discounts 
for time. 

less. A major reason for the postulated orientation of time preference 
in production toward the present is that the opportunities to decide how 
to allocate a given income for consumption over time (given uncertainty 
in future needs in consumption) become more restricted as the receipt 
of that income is more remote from the present. The functional rela- 
tion of time and utility will shift with the changing level of knowledge. 
As the degree of knowledge decreases, the level of the function will 
shift as depicted in Figure 24.2 to represent additional discounting. 

Effort— or its opposite, leisure— has received much notice as a 
contributing factor to the rural low -income problem of the South. The 
presupposition to such an argument is that southern farmers place 
higher values upon leisure than do their northern counterparts, and this 
unique value for leisure conflicts with monetary income -earning incen- 
tives. Regardless of the merit of this hypothesis, effort is a variable 
in valuing production alternatives for farmers of any income level. If 
there is increasing disutility associated with additional units of effort 
required for an alternative in action, as Figure 24.1 portrays, unreal- 
istic results may be obtained from the accounting procedures used in 
farm management. When comparing alternatives with unequal require- 
ments in effort, valuing family labor at no cost when underemployed or 
at a fixed wage rate gives greater advantage to the higher labor -using 
alternatives than placed upon such alternatives by farmers. That is, 
by the postulated increasing disutility for additional effort, a supply 
function for family labor that is sloping upward at an increasing rate is 
assumed. Also, as expressed by equation (6), the effort function is ex- 
pected to change with change in the level of knowledge. This change in 
function may relate, in part, to preferences in productive activity re- 
ferred to in the literature as enterprise preferences. 

The cash costs associated with capital use are accounted for in the 
7r of equation (1). However, there are nonpriced aspects of capital con- 
sidered by individuals in valuation of production alternatives. Reduc- 
tion in security associated with increased capital use is related to de- 
gree of knowledge. Also, there is discounting for additional capital use 



354 W. B. BACK AND VERNER G. HURT 

in a production alternative for reduction in opportunity to invest in con- 
sumption until the capital is replenished by the realization of the con- 
sequences of action. 12 This discounting varies with the initial asset po- 
sition, and it increases as time of realization of the consequences is 
more remote from the present. Such discounting on the capital dimen- 
sion is distinguished from the discounting due to increase in time of 
receipt of income that is accounted for on the time dimension. A dis- 
count for worsening of the asset position, as viewed by the individual 
as capital investment increases from a given asset position, should be 
placed on the capital dimension. The additional discounting with less 
favorable initial asset position is a premise used in defense of the 
proposition that low -income farmers with unfavorable asset positions 
must discount the future much more than high-income farmers because 
of the additional pressure of current consumption on resources. This 
may be true. However, as indicated earlier, such a situation does not 
explain the preference for the present in the receipt of income. 

The knowledge dimension, relating to desire for certainty, excludes 
interdependent effects of knowledge with other dimensions of the value - 
space. However, in the concepts used here, the various economic 
values, the discounting due to lack of knowledge, and the discounting 
due to attitudes independent of uncertainty are distinguished. With per- 
fect knowledge there would be discounting with increases in time, ef- 
fort, or capital. Under conditions of imperfect knowledge, any addi- 
tional discounting on these dimensions, as well as on the knowledge 
dimension, would be attributable to lack of knowledge. If an individual 
is unaware of an alternative in production, such lack of knowledge ac- 
counts for the complete lack of interest in it. 



Illustrations of Economic Value -Space 
Equation (1) may be written more explicitly as: 

(9) U = g(ir) - 2 b t zf; i ■ 1, •••m; n > 1 

since the utility of the nonpriced factors is negative and this disutility 
was postulated as increasing at an increasing rate. In order to present 
an intuitive image of the value -space concept graphically, with eco- 
nomic dimensions, we assume the function: 

(10) U = a - T 2 - E 2 - C 2 - K 2 

where a, T, E, C, and K are g(7r), time, effort, capital, and knowledge, 
respectively. To add to the simplicity of the illustrations, the interac- 
tions among the dimensions are ignored since this simplification does 



12 The cost in reference is a nonmonetary opportunity cost. Monetary opportunity costs 
for competing production alternatives are excluded as influential on the parameters of the 
value-space for particular alternatives in production. 



CAPITAL USE AND INVESTMENT ON FARMS 



355 



not detract from the stated purposes. Utility is also assumed to be 
measurable, and a = 36 is used in order to make the arithmetic sim- 
ple. Value -space is defined as a space of potential interest in n- 
dimensions, or more explicitly, the possible values of T, E, C, and K 
of equation (10) in which U > 0. 13 When U ^ for a production alter- 
native, it is of "no interest" to the decision -maker, and when U > 0, 
the alternative has potential of being selected for action. 

There is, of course, an infinite number of sets of values for the 
variables in equation (10) that can define the outer boundary of value - 
space. Since no more than a three-dimensional space can be illus- 
trated graphically, with a one of these dimensions, a method was im- 
provised to view the relations of the five dimensions, simultaneously, 
by use of the four quadrants of a plane. 

An illustration by use of a single quadrant first will be presented. 
In equation (10), assume that no nonpriced capital is required, and 
knowledge for the alternative is perfect. Then we have the following 
function to examine: 



(11) 



U = 36 



This function defines a utility surface. In Figure 24.3, equation (11) 
is plotted for U = 0. The possible values of effort and time consistent 
with U = is a contour on the utility surface. Utility of 36, the 



EFFORT 




U < 



12 3 4 5 6 TIME 

Fig. 24.3. Illustration of value- space for two dimensions. 



This definition of value-space may be consistent with the conception of an image as 
presented by Kenneth E. Boulding in The Image, University of Michigan Press, Ann Arbor, 
Mich., 1956. 



356 



W. B. BACK AND VERNER G. HURT 



maximum, is at the origin. Other contours or indifference curves, 
such as et in Figure 24.3, indicate substitution possibilities between 
effort and time for given levels of utility. 

In order to expand this illustration, the other three quadrants of the 
plane were developed, each of which considers two of the four non- 
priced factors in production (Figure 24.4). The following functions are 
considered, in addition to equation (11): 



(12) 
(13) 
(14) 



U = 36 



E 2 - C 2 (upper left quadrant) 



U = 36 - C 2 - K 2 (lower left quadrant) 



U = 36 - K 2 - T 2 (lower right quadrant) 



The usual signs attached to the dimensions of the plane are ignored; 
that is, all are considered to be positive, with the exception of 



EFFORT 



CAPITAL 





— — 6~ 
5 

4" 


e \ 




iC 1 , 


3 
2- 

1 ' 


^U-36 


\ \ 


6 5 4',32 


1 


1 2 3 
" 1 
"2 
"3 


4 15 6 




k 


4 / 


/ 







TIME 



DEGREE OF 
KNOWLEDGE 



Fig. 24.4. Possible combinations of effort, time, knowledge, and capital 
for a value-space. 



CAPITAL USE AND INVESTMENT ON FARMS 357 

knowledge, which is assumed to be perfect at the origin (zero), and 
imperfections in knowledge are indicated by negative numbers. An in- 
creasing distance from the origin on any dimension reduces the net 
utility. The particular functions and scale selected for each dimension 
result in quarter circles for utility contours in each quadrant or, when 
joined, are circles in the plane. 

If the values are fixed for two of the dimensions for a production 
alternative, the outer boundary of interest can be determined in ter